IN RE JONES, (Bankr.E.D.Wash. 1998)

PATRICIA WILLIAMS, Chief Judge, Bankruptcy.

THIS MATTER came on for hearing before the Honorable Patricia C. Williams on February 20, 1998 for a valuation hearing to determine the value of the Northland Credit Union collateral. Joseph Harkrader appeared on behalf of the Chapter 13 Trustee; Gregory Heline appeared on behalf of the debtor; and Theodore Schott appeared on behalf of Northland Credit Union. The court reviewed the files and records herein, heard argument of counsel and was fully advised in the premises. The court now enters its memorandum decision.

Debtors in this Chapter 13 proceeding own a 1992 all-wheel drive Dodge Caravan. The bankruptcy was commenced on September 25, 1997 and in their plan the debtors value the vehicle at $9,400. The lienholder Northland Credit Union was owed, as of the date of filing, $13,109.13. An objection to claim has been filed by the debtor and an objection to the Plan has been filed by the creditor. The valuation hearing was held on February 20, 1998 and both parties agreed that the value was to be determined as of the date of the commencement of the bankruptcy proceeding.

The debtor, Mr. Jones, testified that the value referenced in the Plan, i.e. $9,400, was based solely upon the wholesale NADA blue book for September, 1997 after appropriate additions and deductions for accessories and mileage. Mr. Bartlett, a self-employed vehicle appraiser, testified on behalf of the creditor and was qualified as an expert. He opined that the automobile had a value of $11,800. Mr. Bartlett's written appraisal was based upon an inspection of the vehicle and sales of comparable vehicles.

The ultimate question presented was the appropriate method to value vehicles in Chapter 13 consumer proceedings in the aftermath of Associates Commercial Corp. v. Rash, 117 S.Ct. 1879 (1997). In that case, the Supreme Court held that the allowed amount of a secured claim under § 506(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." The Supreme Court referred to this as the "replacement value" standard, but Footnote No. 2 also stated that ". . . Our use of the term replacement value is consistent with the Ninth Circuit's understanding of the meaning of fair market value. . . ." To those of us in the Ninth Circuit, "replacement value" may be a new term but it has the same meaning as our old friend "fair market value," i.e. what a willing buyer would pay a willing seller.

Bankruptcy courts throughout the Ninth Circuit regularly value assets. The relevant market is surveyed, the asset is inspected, and comparable sales are found. Nothing in Rash has changed this process. The relevant market for a debtor which is an automobile dealer or has regular access to the wholesale dealer market would be the wholesale market. For the average consumer Chapter 13 debtor, the relevant market is the retail market. The NADA or Kelly blue book reflects the largest portion of the market which is sales by used automobile dealers. However, private sales are also part of the market. Used vehicles are commonly sold to ultimate consumers by private individuals and businesses. Local newspapers daily advertise such sales and area publications such as Wheels Deals are devoted primarily to advertising and facilitating such sales.

In order to determine the fair market value of any asset, be it real estate, heavy equipment or a vehicle, the unique characteristics and condition of the asset must be determined. Through this process, the fair market value is determined. Not only Rash, but the cases interpreting it are consistent with this process.

Since Rash, Judge Small, in the Bankruptcy Court for the Eastern District of North Carolina, has concluded that nothing in the Rash decision precludes it from continuing to utilize the NADA retail blue book as the starting point to determine the allowed secured claim for a consumer automobile.

The starting point for valuation of an automobile to be retained by a Chapter 13 debtor has been the NADA retail blue book with adjustments agreed to by the debtor, the secured creditor and the Chapter 13 trustee. If the parties do not agree, a hearing is held and the court determines the value using a replacement standard which in most cases is retail value. That practice has worked and will continue in this district.

Judge Killian, in the Bankruptcy Court in the Northern District of Florida, however, concluded that nothing in Rash is inconsistent with its continued use of the average of the wholesale and retail NADA values as a starting point. In re Franklin, 213 B.R. 781 (N.D. Fla. 1997). In Franklin, the Florida court concluded that by expressly recognizing the various components which determine retail price such as warranties, reconditioning, etc., the Supreme Court has allowed bankruptcy courts to continue to measure replacement value at some point between wholesale and retail.

The Oklahoma Bankruptcy Court in In re Younger, 1998 WL 13681 (Bankr. W.D. Okla. 1998) thoroughly analyzed not only Rash but the above-referenced cases and concluded that nothing in Rash precluded it from utilizing the same approach it had taken before Rash. That approach was to average the wholesale and retail NADA values and use that as a starting point to determine the allowed secured claim. After determining the appropriate "starting point," all of these courts then examined the unique characteristics of the vehicle in question.

In re McElroy, 210 B.R. 833 (D. Or. 1997) was the only post- Rash decision reported in the Ninth Circuit. In that decision, the court recognized that the term "replacement value" as used in Rash is equivalent to the term "fair market value", i.e. the price that a willing buyer would pay a willing seller. The determination of value in that case was based upon a comprehensive evidentiary hearing with expert testimony.

This approach was heavily criticized by the Oklahoma court in Younger. Although conceding that requiring an evidentiary hearing with expert testimony would result in accurate valuation, the Younger court felt that such requirements were impracticable and "virtually impossible" to implement.

This court concludes that the appropriate methodology to determine the fair market value of vehicles being retained by consumer Chapter 13 debtors falls somewhere between the extensive evidentiary hearing required in In re McElroy and the strict mathematical calculations based upon NADA blue book used in other jurisdictions.

First, the NADA or Kelly blue book retail values are relevant to determine fair market or replacement value. The market for used vehicles which is available to consumer debtors is largely, but not entirely, dealers engaged in retail sales. These blue books are used daily by both purchasers and sellers and are reliable indicators of market price. All of the cases cited above allowed blue books as reliable evidence of value.

Secondly, as noted above, the market available to consumer debtors also consists of "private sales", i.e. sales by individuals or businesses of their own used vehicles. In the Younger case, one of the expert witnesses used two private sales as well as a sale by a dealer to determine his opinion of value. As was discussed in the Younger case, advertisements of sales prices, either by dealers or private parties, are relevant, but in order to most credibly determine fair market value, ". . . actual sales prices should be used."

Both Rash and traditional analysis of fair market values are based upon current area market prices for "like property." An opinion of value which is not based upon a physical examination of the vehicle at issue, is of questionable validity. The vehicle at issue may be in poor or excellent condition or may have defects. "Like property" requires the actual condition of the vehicle at issue to be considered. As stated in In re Younger, the weight of testimony is adversely affected if the witness has not inspected the automobile in question.

Much has been made of a single sentence in a footnote to the Rash decision to the effect that a retail value may not be replacement value unless certain dealer added items such as warranties and reconditioning are deducted. However, by considering as part of the market the private sales where such items are not added, much of the Supreme Court's concern is eliminated. More importantly, the physical inspection and comparable sales approach result in the adjustments contemplated by the Rash court being made. In fact, this is exactly what occurred in the Franklin case where the cost of reconditioning the vehicle for sale was deducted from the value. Also, in McElory, the court deducted the cost of certain necessary repairs in determining value. There is nothing in Rash which mandates a different approach or which requires this or any court to determine profit margins and operation costs of automobile dealers to determine the fair market value of a vehicle.

As the debtor primarily relied upon wholesale NADA value, his value is too low. This consumer debtor has no access to the wholesale market. The relevant market for this debtor is the retail market. Mr. Bartlett testified that he used the NADA only fleetingly to determine "where I am at." He does not rely primarily upon the NADA as a physical appraisal is "better." Value is based upon condition, mileage, any mechanical problems and the local market. He inspected the vehicle and relied upon advertisements for 1992 Dodge Caravans on the Internet, in Wheels Deals and in local newspapers. In his opinion, the relevant market for this particular vehicle is not the entire Pacific Northwest but the Inland Empire. He did, however, gather information from not only the Pacific Northwest but other areas. According to Mr. Bartlett, in late summer through early winter in the Inland Empire, 4-wheel drive or all-wheel vehicles sell for significantly more than NADA and significantly more than in some areas of the Pacific Northwest. He testified that for a vehicle of this type, $2,000 should be added to the NADA retail value. The debtor used the standard NADA add-on of $1,200.

The NADA categorizes vehicles by type and then determines a deduction for "high mileage." Mr. Bartlett determined this was a category II vehicle which should have a high mileage deduction of $500. The debtor was unable to articulate his deduction for high mileage, but indicated some deduction would be appropriate. Mr. Bartlett testified that in the market there are five classes of condition from Class 1 for "like new" to Class 5 for "bad." He placed this vehicle between average and high average so made no deduction or addition for condition. He did deduct for the condition of the tires and certain costs of preparing the vehicle for sale. This resulted in his opinion that the fair market or replacement value of the vehicle is $11,800.

There was considerable testimony regarding Mr. Bartlett's comparable sale as he relied upon advertised prices for that sale. His primary comparable sale was a sale by a private party, but the seller only indicated that the sales price was "close" to the advertised price. Mr. Bartlett testified that in his experience this would mean "$400 to $500" less than the advertised price. Because Mr. Bartlett's primary comparable sale was based upon an advertised price rather than an actual sale price, an adjustment to his opinion of value must be made. Using Mr. Bartlett's estimate, I find that the fair market or replacement value of the 1992 Dodge Caravan is $11,300.

The Clerk of Court is directed to file this Order and provide copies to counsel.