NOTICE: This opinion is subject to formal revision before publication in the preliminary print of the United States Reports. Readers are requested to notify the Reporter of Decisions, Supreme Court of the United States, Washington, D.C. 20543, of any typographical or other formal errors, in order that corrections may be made before the preliminary print goes to press. SUPREME COURT OF THE UNITED STATES -------- No. 96-454 -------- ASSOCIATES COMMERCIAL CORPORATION, PETITIONER v. ELRAY RASH ET UX. __ ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT [June 16, 1997] JUSTICE GINSBURG delivered the opinion of the Court. * * We resolve in this case a dispute concerning the proper application of S506(a) of the Bankruptcy Code when a bankrupt debtor has exercised the "cram down" option for which Code S1325(a)(5)(B) provides. Specifically, when a debtor, over a secured creditor's objection, seeks to retain and use the creditor's collateral in a Chapter 13 plan, is the value of the collateral to be determined by (1) what the secured creditor could obtain through foreclosure sale of the property (the "foreclosure-value" standard); (2) what the debtor would have to pay for comparable property (the "replacement-value" standard); or (3) the midpoint between these two measurements? We hold that S506(a) directs application of the replacement-value standard. I In 1989, respondent Elray Rash purchased for $73,700 a Kenworth tractor truck for use in his freight-hauling business. Rash made a downpayment on the truck, agreed to pay the seller the remainder in 60 monthly ____________________ *JUSTICE SCALIA joins all but footnote 4 of this opinion. * 96-454 - OPINION 2 ASSOCIATES COMMERCIAL CORP. v. RASH __ installments, and pledged the truck as collateral on the unpaid balance. The seller assigned the loan, and its lien on the truck, to petitioner Associates Commercial Corporation (ACC). In March 1992, Elray and Jean Rash filed a joint petition and a repayment plan under Chapter 13 of the Bankruptcy Code (Code), 11 U. S. C. SS1301-1330. At the time of the bankruptcy filing, the balance owed to ACC on the truck loan was $41,171. Because it held a valid lien on the truck, ACC was listed in the bank- ruptcy petition as a creditor holding a secured claim. Under the Code, ACC's claim for the balance owed on the truck was secured only to the extent of the value of the collateral; its claim over and above the value of the truck was unsecured. See 11 U. S. C. S506(a). To qualify for confirmation under Chapter 13, the Rashes' plan had to satisfy the requirements set forth in S1325(a) of the Code. The Rashes' treatment of ACC's secured claim, in particular, is governed by subsection (a)(5). (Ftnote. 1) Under this provision, a plan's proposed treatment of secured (Ftnote. 1) claims can be confirmed if one of three conditions is satisfied: the secured creditor accepts the plan, see 11 U. S. C. S1325(a)(5)(A); the debtor surren- ____________________ 1) Section 1325(a)(5) states: 1) "(a) Except as provided in subsection (b), the court shall confirm a plan if - . . . . . "(5) with respect to each allowed secured claim provided for by the plan - "(A) the holder of such claim has accepted the plan; "(B)(i) the plan provides that the holder of such claim retain the lien securing such claim; and "(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; or "(C) the debtor surrenders the property securing such claim to such holder." 96-454 - OPINION ASSOCIATES COMMERCIAL CORP. v. RASH 3 __ ders the property securing the claim to the creditor, see S1325(a)(5)(C); or the debtor invokes the so-called "cram down" power, see S1325(a)(5)(B). Under the cram down option, the debtor is permitted to keep the property over the objection of the creditor; the creditor retains the lien securing the claim, see S1325(a)(5)(B)(i), and the debtor is required to provide the creditor with payments, over the life of the plan, that will total the present value of the allowed secured claim, i.e, the present value of the collateral, see ___ S1325(a)(5)(B)(ii). The value of the allowed secured claim is governed by S506(a) of the Code. The Rashes' Chapter 13 plan invoked the cram down power. It proposed that the Rashes retain the truck for use in the freight-hauling business and pay ACC, over 58 months, an amount equal to the present value of the truck. That value, the Rashes' petition alleged, was $28,500. ACC objected to the plan and asked the Bankruptcy Court to lift the automatic stay so ACC could repossess the truck. ACC also filed a proof of claim alleging that its claim was fully secured in the amount of $41,171. The Rashes filed an objection to ACC's claim. The Bankruptcy Court held an evidentiary hearing to resolve the dispute over the truck's value. At the hearing, ACC and the Rashes urged different valuation benchmarks. ACC maintained that the proper valuation was the price the Rashes would have to pay to purchase a like vehicle, an amount ACC's expert estimated to be $41,000. The Rashes, however, maintained that the proper valuation was the net amount ACC would realize upon foreclosure and sale of the collateral, an amount their expert estimated to be $31,875. The Bankruptcy Court agreed with the Rashes and fixed the amount of ACC's secured claim at $31,875; that sum, the court found, was the net amount ACC would realize if it exercised its right to repossess and sell the truck. See 96-454 - OPINION 4 ASSOCIATES COMMERCIAL CORP. v. RASH __ In re Rash, 149 B. R. 430, 431-432 (Bkrtcy. Ct. ED Tex. 1993). The Bankruptcy ___________ Court thereafter approved the plan, and the United States District Court for the Eastern District of Texas affirmed. A panel of the Court of Appeals for the Fifth Circuit reversed. In re Rash, ___________ 31 F. 3d 325 (1994). On rehearing en banc, however, the Fifth Circuit affirmed the District Court, holding that ACC's allowed secured claim was limited to $31,875, the net foreclosure value of the truck. In re Rash, 90 F. 3d 1036 ___________ (1996). In reaching its decision, the Fifth Circuit highlighted, first, a conflict it perceived between the method of valuation ACC advanced, and the law of Texas defining the rights of secured creditors. See id., at 1041-1042 (citing Tex. ____ Bus. & Com. Code Ann. SS9.504(a), (c), 9.505 (1991)). In the Fifth Circuit's view, valuing collateral in a federal bankruptcy proceeding under a replacement- value standard - thereby setting an amount generally higher than what a secured creditor could realize pursuing its state-law foreclosure remedy - would "chang[e] the extent to which ACC is secured from what obtained under state law prior to the bankruptcy filing." 90 F. 3d, at 1041. Such a departure from state law, the Fifth Circuit said, should be resisted by the federal forum unless "clearly compel[led]" by the Code. Id., at 1042. ____ The Fifth Circuit then determined that the Code provision governing valuation of security interests, S506(a), does not compel a replacement-value approach. Instead, the court reasoned, the first sentence of S506(a) requires that collateral be valued from the creditor's perspective. See id., at 1044. And ____ because "the creditor's interest is in the nature of a security interest, giving the creditor the right to repossess and sell the collateral and nothing more[,] . . . . the valuation should start with what the creditor could realize by exercising that right." Ibid. This foreclosure-value standard, the Fifth _____ Circuit found, was consistent with the other rele- 96-454 - OPINION ASSOCIATES COMMERCIAL CORP. v. RASH 5 __ vant provisions of the Code, economic analysis, and the legislative history of the pertinent provisions. See id., at 1045-1059. Judge Smith, joined by five ____ other judges, dissented, urging that the Code dictates a replacement-value standard. See id., at 1061-1075. ____ Courts of Appeals have adopted three different standards for valuing a security interest in a bankruptcy proceeding when the debtor invokes the cram down power to retain the collateral over the creditor's objection. In contrast to the Fifth Circuit's foreclosure-value standard, a number of Circuits have followed a replacement-value approach. See, e.g., In re Taffi, 96 F. 3d 1190, _____ ____________ 1191-1192 (CA9 1996) (en banc), cert. pending sub nom. Taffi v. United States, _______________ ______________ No. 96-881; (Ftnote. 2) In re Winthrop Old Farm Nurseries, Inc., 50 F. 3d 72, (Ftnote. 2) __________________________________ ______ 74-75 (CA1 1995); In re Trimble, 50 F. 3d 530, 531-532 (CA8 1995). Other courts ______________ have settled on the midpoint between foreclosure value and replacement value. See In re Hoskins, 102 F. 3d 311, 316 (CA7 1996); cf. In re Valenti, 105 F. 3d ______________ ______________ 55, 62 (CA2 1997) (bankruptcy courts have discretion to value at midpoint between replacement value and foreclosure value). We granted certiorari to resolve this conflict among the Courts of Appeals, see 519 U. S. ___ (1996), and we now reverse the Fifth Circuit's judgment. ____________________ 2) In In re Taffi, the Ninth Circuit contrasted replacement value with 2) ____________ fair-market value and adopted the latter standard, apparently viewing the two standards as incompatible. See 96 F. 3d, at 1192. By using the term "replacement value," we do not suggest that a creditor is entitled to recover what it would cost the debtor to purchase the collateral brand new. Rather, our use of the term replacement value is consistent with the Ninth Circuit's under- standing of the meaning of fair-market value; by replacement value, we mean the price a willing buyer in the debtor's trade, business, or situation would pay a willing seller to obtain property of like age and condition. See also infra at _____ 11-12, n. 6. 96-454 - OPINION 6 ASSOCIATES COMMERCIAL CORP. v. RASH __ II The Bankruptcy Code provision central to the resolution of this case is S506(a), which states: "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 . . . ." 11 U. S. C. S506(a). Over ACC's objection, the Rashes' repayment plan proposed, pursuant to S1325(a)(5)(B), continued use of the property in question, i.e., the truck, in _____ the debtor's trade or business. In such a "cram down" case, we hold, the value of the property (and thus the amount of the secured claim under S506(a)) is the price a willing buyer in the debtor's trade, business, or situation would pay to obtain like property from a willing seller. Rejecting this replacement-value standard, and selecting instead the typically lower foreclosure-value standard, the Fifth Circuit trained its attention on the first sentence of S506(a). In particular, the Fifth Circuit relied on these first sentence words: a claim is secured "to the extent of the value of such creditor's interest in the estate's interest in such property." See 90 F. 3d, ____________________ at 1044 (citing S506(a)) (emphasis added). The Fifth Circuit read this phrase to instruct that the "starting point for the valuation [is] what the creditor could realize if it sold the estate's interest in the property according to the security agreement," namely, through "repossess[ing] and sell[ing] the collateral." 90 F. 3d, at 1044. 96-454 - OPINION ASSOCIATES COMMERCIAL CORP. v. RASH 7 __ We do not find in the S506(a) first sentence words - "the creditor's interest in the estate's interest in such property" - the foreclosure-value meaning advanced by the Fifth Circuit. Even read in isolation, the phrase imparts no valuation standard: A direction simply to consider the "value of such creditor's interest" does not expressly reveal how that interest is to be valued. ___ Reading the first sentence of S506(a) as a whole, we are satisfied that the phrase the Fifth Circuit considered key is not an instruction to equate a "creditor's interest" with the net value a creditor could realize through a foreclosure sale. The first sentence, in its entirety, tells us that a secured creditor's claim is to be divided into secured and unsecured portions, with the secured portion of the claim limited to the value of the collateral. See United ______ States v. Ron Pair Enterprises, Inc., 489 U. S. 235, 238-239 (1989); 4 L. King, ______ ___________________________ Collier on Bankruptcy (para.)506.02[1][a], p. 506-6 (15th ed. rev. 1996). To separate the secured from the unsecured portion of a claim, a court must compare the creditor's claim to the value of "such property," i.e., the collateral. _____ That comparison is sometimes complicated. A debtor may own only a part interest in the property pledged as collateral, in which case the court will be required to ascertain the "estate's interest" in the collateral. Or, a creditor may hold a junior or subordinate lien, which would require the court to ascertain the creditor's interest in the collateral. The S506(a) phrase referring to the "creditor's interest in the estate's interest in such property" thus recognizes that a court may encounter, and in such instances must evaluate, limited or partial interests in collateral. The full first sentence of S506(a), in short, tells a court what it must evaluate, but it does not say more; it is not enlightening on how to value collateral. The second sentence of S506(a) does speak to the how question. "Such value," ___ that sentence provides, "shall be determined in light of the purpose of the valuation and 96-454 - OPINION 8 ASSOCIATES COMMERCIAL CORP. v. RASH __ of the proposed disposition or use of such property." S506(a). By deriving a foreclosure-value standard from S506(a)'s first sentence, the Fifth Circuit rendered inconsequential the sentence that expressly addresses how "value shall be determined." As we comprehend S506(a), the "proposed disposition or use" of the collateral is of paramount importance to the valuation question. If a secured creditor does not accept a debtor's Chapter 13 plan, the debtor has two options for handling allowed secured claims: surrender the collateral to the creditor, see S1325(a)(5)(C); or, under the cram down option, keep the collateral over the creditor's objection and provide the creditor, over the life of the plan, with the equivalent of the present value of the collateral, see S1325(a)(5)(B). The "disposition or use" of the collateral thus turns on the alternative the debtor chooses - in one case the collateral will be surrendered to the creditor, and in the other, the collateral will be retained and used by the debtor. Applying a foreclosure-value standard when the cram down option is invoked attributes no significance to the different consequences of the debtor's choice to surrender the property or retain it. A replacement-value standard, on the other hand, distinguishes retention from surrender and renders meaningful the key words "disposition or use." Tying valuation to the actual "disposition or use" of the property points away from a foreclosure-value standard when a Chapter 13 debtor, invoking cram down power, retains and uses the property. Under that option, foreclosure is averted by the debtor's choice and over the creditor's objection. From the creditor's perspective as well as the debtor's, surrender and retention are not equivalent acts. When a debtor surrenders the property, a creditor obtains it immediately, and is free to sell it and reinvest the proceeds. We recall here that ACC sought that very 96-454 - OPINION ASSOCIATES COMMERCIAL CORP. v. RASH 9 __ advantage. See supra, at 3. If a debtor keeps the property and continues to ______ use it, the creditor obtains at once neither the property nor its value and is exposed to double risks: The debtor may again default and the property may deteriorate from extended use. Adjustments in the interest rate and secured creditor demands for more "adequate protection," 11 U. S. C. S361, do not fully offset these risks. See 90 F. 3d, at 1066 (Smith, J., dissenting) ("vast majority of reorganizations fail . . . leaving creditors with only a fraction of the compensation due them"; where, as here, "collateral depreciates rapidly, the secured creditor may receive far less in a failed reorganization than in a prompt foreclosure") (internal cross-reference omitted); accord In re Taffi, 96 ____________ F. 3d, at 1192-1193. (Ftnote. 3) (Ftnote. 3) Of prime significance, the replacement-value standard accurately gauges the debtor's "use" of the property. It values "the creditor's interest in the collateral in light of the proposed [repayment plan] reality: no foreclosure sale and economic benefit for the debtor derived from the collateral equal to . . . its [replacement] value." In re Winthrop Old Farm Nurseries, 50 F. 3d, at __________________________________ 75. The debtor in this case elected to use the collateral to generate an income stream. That actual use, rather than a foreclosure sale that will not take place, is the proper guide under a prescription hinged to the property's "disposition or use." See ibid. (Ftnote. 4) (Ftnote. 4) _____ ____________________ 3) On this matter, amici curiae supporting ACC contended: "`Adequate 3) _____________ protection' payments under 11 U. S. C. SS361, 362(d)(1) typically are based on the assumption that the collateral will be subject to only ordinary depreci- ation. Hence, even when such payments are made, they frequently fail to compensate adequately for the usually more rapid depreciation of assets retained by the debtor." Brief for American Automobile Manufacturers Association, Inc., et al. as Amici Curiae 21, n. 9. ____________ 4) We give no weight to the legislative history of S506(a), noting that it 4) is unedifying, offering snippets that might support either standard of valuation. The Senate Report simply repeated the phrase contained in the second sentence of S506(a). See S. Rep. No. 95-989, p. 68 (1978). The House Report, in the Fifth Circuit's view, rejected a "replacement cost" valuation. See In re _____ Rash, 90 F. 3d 1036, 1056 (CA5 1996) (quoting H. Rep. No. 95-595, p. 124 _____ (1977)). That Report, however, appears to use the term "replacement cost" to mean the cost of buying new property to replace property in which a creditor had a security interest. See id., at 124. In any event, House Report excerpts are ____ not enlightening, for the provision pivotal here - the second sentence of S506(a) - did not appear in the bill addressed by the House Report. The key sentence originated in the Senate version of the bill, compare H. R. 8200, 95th Cong., 1st Sess., S506(a) (1977), with S. 2266, 95th Cong., 1st Sess., S506(a) (1977), and was included in the final text of the statute after the House-Senate conference, see 124 Cong. Rec. 33997 (1978). 96-454 - OPINION 10 ASSOCIATES COMMERCIAL CORP. v. RASH __ The Fifth Circuit considered the replacement-value standard disrespectful of state law, which permits the secured creditor to sell the collateral, thereby obtaining its net foreclosure value "and nothing more." See 90 F. 3d, at 1044. In allowing Chapter 13 debtors to retain and use collateral over the objection of secured creditors, however, the Bankruptcy Code has reshaped debtor and cred- itor rights in marked departure from state law. See, e.g., Uniform Commercial ____ Code SS9-504, 9-505, 3B U. L. A. 127, 352 (1992). The Code's cram down option displaces a secured creditor's state-law right to obtain immediate foreclosure upon a debtor's default. That change, ordered by federal law, is attended by a direction that courts look to the "proposed disposition or use" of the collateral in determining its value. It no more disrupts state law to make "disposition or use" the guide for valuation than to authorize the rearrangement of rights the cram down power entails. Nor are we persuaded that the split-the-difference approach adopted by the Seventh Circuit provides the appropriate solution. See In re Hoskins, 102 ______________ F. 3d, at 316. Whatever the attractiveness of a standard that 96-454 - OPINION ASSOCIATES COMMERCIAL CORP. v. RASH 11 __ picks the midpoint between foreclosure and replacement values, there is no warrant for it in the Code. (Ftnote. 5) Section 506(a) calls for the value the (Ftnote. 5) property possesses in light of the "disposition or use" in fact "proposed," not the various dispositions or uses that might have been proposed. Cf. BFP v. ___ Resolution Trust Corporation, 511 U. S. 531, 540 (1994) (court-made rule _____________________________ defining, for purposes of Code's fraudulent transfer provision, "reasonably equivalent value" to mean 70% of fair market value "represent[s] [a] policy determinatio[n] that the Bankruptcy Code gives us no apparent authority to make"). The Seventh Circuit rested on the "economics of the situation," In re _____ Hoskins, 102 F. 3d, at 316, only after concluding that the statute suggests no ________ particular valuation method. We agree with the Seventh Circuit that "a simple rule of valuation is needed" to serve the interests of predictability and uniformity. Id., at 314. We conclude, however, that S506(a) supplies a govern- ___ ing instruction less complex than the Seventh Circuit's "make two valuations, then split the difference" formulation. In sum, under S506(a), the value of property retained because the debtor has exercised the S1325(a)(5)(B) "cram down" option is the cost the debtor would incur to obtain a like asset for the same "proposed . . . use." (Ftnote. 6) (Ftnote. 6) ____________________ 5) As our reading of S506(a) makes plain, we also reject a ruleless 5) approach allowing use of different valuation standards based on the facts and circumstances of individual cases. Cf. In re Valenti, 105 F. 3d 55, 62-63 (CA2 _____________ 1997) (permissible for bankruptcy courts to determine valuation standard case- by-case). 6) Our recognition that the replacement-value standard, not the 6) foreclosure-value standard, governs in cram down cases leaves to bankruptcy courts, as triers of fact, identification of the best way of ascertaining replacement value on the basis of the evidence presented. Whether replacement value is the equivalent of retail value, wholesale value, or some other value will depend on the type of debtor and the nature of the property. We note, however, that replacement value, in this context, should not include certain items. For example, where the proper measure of the replacement value of a vehicle is its retail value, an adjustment to that value may be necessary: A creditor should not receive portions of the retail price, if any, that reflect the value of items the debtor does not receive when he retains his vehicle, items such as warranties, inventory storage, and reconditioning. Cf. 90 F. 3d, at 1051-1052. Nor should the creditor gain from modifications to the property - e.g., the addition of accessories to a vehicle - to which a creditor's lien ____ would not extend under state law. 96-454 - OPINION 12 ASSOCIATES COMMERCIAL CORP. v. RASH __ * * * For the foregoing reasons, the judgment of the Court of Appeals is reversed, and the case is remanded for further proceedings consistent with this opinion. It is so ordered. _________________