Memorandum of Decision Re: Valuation of Collateral

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re MARIN TOWN CENTER,                                       No. 1-90-00811      Debtor. ___________________________/ MARIN TOWN CENTER,      Plaintiff,    v.                                                                              A.P. No. 1-90-0083 DREXEL BURNHAM LAMBERT,      Defendant. ______________________________/
Memorandum of Decision
     Creditor Drexel Burnham Lambert holds a second position lien on the debtor's real property. The debtor's complaint in this adversary proceeding alleges that the value of the property does not exceed the value of the senior lien, so that Drexel has no allowable secured claim pursuant to section 506(a) of the Bankruptcy Code. The debtor prays for such a declaration and a judgment voiding Drexel's lien pursuant to section 506(d) and preserving the avoided lien for the benefit of the estate pursuant to section 551. Drexel has moved the court for dismissal on grounds that the complaint fails to state a cause of action and fails to name the senior lienholder as a party. It also seeks a more definite statement in order to determine the date for valuation of the property.      The issue Drexel has raised highlights an apparent inconsistency between different parts of the Bankruptcy Code and Rules. Section 506(d) provides that a lien is void to the extent that there is insufficient value in the property. Rule 7001(2) provides that a dispute over the validity, priority or extent of a lien should be raised by adversary proceeding. Section 551 provides that any lien void under section 506(d) is preserved for the benefit of the estate. Section 103(a) makes sections 506 and 551 applicable in Chapter 11 cases. The logical inference from all of this is that in a Chapter 11 case a debtor may bring an adversary proceeding seeking to determine the extent of a creditor's lien and requesting a declaration that it is void to the extent there is not value in the collateral. This is exactly what the debtor has done in this case.      However, section 506(a) specifically provides that the value of property subject to a creditor's lien "shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor's interest." The leading bankruptcy treatise interprets this provision as meaning that the extent to which an allowed claim constitutes a secured claim may vary during the course of a case. 3 Collier on Bankruptcy (15th Ed.), p. 506-21. It goes on to note:
         [T]he amount of any claim secured by collateral          of changeable value must be regarded as a "moving          target" and, in view of the potential significance          of such amount at different stages of a bankruptcy          case, may be an important and recurring issue in          the case.
     Id., p. 506-22. Obviously, the amount of a secured claim cannot be a "recurring issue" if a single adversary proceeding can fix a value for all purposes. The court finds Collier's views to be consistent with its own general understanding of the Bankruptcy Code, and therefore agrees with Drexel that this adversary proceeding cannot be used to fix the amount of its secured claim for all purposes, and particularly cannot be used to establish the value for purposes of a plan. This does not mean, however, that the proceeding should be dismissed.      The court has already heard what seems like endless argument over the use of cash collateral and Drexel's right to adequate protection. If the debtor is right in its assertions, then Drexel has no cash collateral and nothing to be adequately protected. There is accordingly a very good reason for the court to fix the value of its secured claim, if only to avoid having to listen to an extra argument every time a cash collateral issue comes up.      The complaint does not state the reason for valuation. It will not be dismissed, but any judgment will be deemed applicable only to cash collateral and adequate protection rights, and will not be res judicata as to other issues which may arise, including plan confirmation. For purposes of this adversary proceeding, July 6, 1990, shall be the valuation date.      Since any judgment arising out of this adversary proceeding is interlocutory in nature and will not be binding for plan confirmation or other purposes, there is no compelling reason to join the senior lienholder as a party. The burden of proof as to the amount of the senior lien is of course on the debtor.      For the above reasons, the motions to dismiss and for a more definite statement will be denied. However, any judgment obtained in this adversary proceeding will not be binding as to any disputes except those involving cash collateral and adequate protection, and the value of Drexel's secured claim may be relitigated in any subsequent dispute including a contested request for confirmation of a plan.      Counsel for the debtor shall submit a form of order which counsel for Drexel has approved as conforming to this decision.
Dated: July 30, 1990                                                                              _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy