Memorandum of Decision Re: Valuation of Equipment

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re ELMER'S PANCAKE & STEAK                                     No. 1-89-00068 HOUSE OF NORTHERN CALIFORNIA, INC.,      Debtor. ___________________________/ ELMER'S PANCAKE & STEAK HOUSE OF NORTHERN CALIFORNIA, INC.,      Plaintiff,    v.                                                                                      A.P. No. 1-89-0084 JANIS USHER,      Defendant. ______________________________/
Memorandum of Decision
     Prior to filing its Chapter 11 petition, the debtor operated a restaurant. Soon after the case was commenced, the court authorized the sale of the restaurant for $550,000.00, and that sale has been consummated. The contract of sale did not allocate the purchase price between the assets purchased.      Defendant Janis Usher holds two notes secured by the restaurant equipment. The balance due on the notes is in excess of $150,000.00. Pursuant to court order, her lien attached to the proceeds of sale. The only issue remaining to be decided in this adversary proceeding is the amount of her lien under sections 506(a) and (d) of the Bankruptcy Code, which limit the lien to the value of the collateral.      The purchaser of the restaurant from the debtor, Gerald Lane, is an experienced restaurateur well qualified to evaluate restaurant equipment. He did not purchase the debtor's restaurant with an eye to continuing it in its prebankruptcy form, but is instead converting it to a Denny's franchise. As such, he had no use for most of the equipment, which he described as being in generally poor shape; much of it was inoperable or did not meet Health Department standards. Instead of using the equipment, he placed ads in newspapers to sell it. The ads produced about 200 interested persons who paid a total of $7,800.00 for most of the equipment. Lane attributes only a nominal value to the equipment he did not sell.      The debtor produced an appraiser, Frank Arietta, who valued the equipment at $183,000.00. Interestingly, neither he nor Lane really contradicted each other. Much of the equipment which the debtor had used in its business was custom made, and very expensive to purchase or reproduce. However, when removed and sold outside the business it was worth little more than scrap. Thus, the issue before the court is not so much the ultimate value as it is the method the court should use to find the value.      There is scant case authority to guide the court in this matter, and no binding authority. However, the court has reviewed Queenan, "Standards for Valuation of Security Interests in Chapter 11," 92 Com.L.J. 18 (1987), and has found this article to be helpful and instructive. Judge Queenan points out that much of the case law onvaluation fails to distinguish between the value of ownership rights and the value of security interests, and that if the distinction is not made the secured creditor can be awarded a "bonus" over and above what the secured creditor really owns, which is essentially a right to foreclose.      Judge Queenan carves out a possible exception to his general rejection of the "going concern" valuation standard where the the debtor sells the entirety of its business as a going concern. However, he makes it clear that this standard is only appropriate, if at all, where the equipment is to be used to continue the income stream of the business. In the present case, the purchaser had no intent to actually use the equipment, and a valuation based on income is therefore clearly inappropriate.      This court's analysis leads it to the same conclusion urged by Judge Queenan. Defendant has no right to insist that her collateral continue to be used in any business, and her collateral is not in fact being used in any business. Under section 1129(b)(2) of the Code, her entire secured claim could be satisfied by delivering the equipment to her front door. Under these circumstances, the equipment should be valued at what she would have realized if this had been done. Valuation should not be based on hypothetical use in a continuing business.      While the court generally accepts Lane's valuations, he was unable to venture even a guess as to the value of certain unsold items. As to these items, the court must accept Arietta's values. Using Lane's values where he has placed a value, and Arietta's values as to the rest, the court finds that the value of the equipment is $20,432.00.      Counsel for defendant shall submit an appropriate form of judgment, which counsel for the debtor shall approve as to form. Each side shall bear its own costs.      This memorandum constitutes findings and conclusions pursuant to FRCP 52(a) and Bankruptcy Rule 7052.
Dated: August 29, 1989                                                                           _______________________                                                                                                                Alan Jaroslovsky                                                                                                                U.S. Bankruptcy