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Mobile Home Valuations – For Once Location Doesn’t Matter

It is common knowledge that in the real estate market, the selling price for a mobile home is almost always dependent upon where is located. Yet, in a recent Chapter 11 case in the district of Delaware, Boomerang Tube LLC, the debtors relied upon a decision by Bankruptcy Judge Shannon, In re George Welch Sr. (Bankr. D. Del. October 19, 2015).

In that Chapter 13 setting, the debtor suggested that the replacement value of the equipment was the proper valuation for purposes of the cramdown sought in their Plan. In this Plan, the chapter 13 debtors’ sought to assume the ground lease, retain the mobile home, and cramdown the secured creditor’s claim to value the of the mobile home as determined in the NADA Retail Value Guidebook for Manufactured and Mobile Homes.

The creditor objected based upon an appraisal it had obtained, which valued the mobile home at $80,000 “in place.” The creditor reasoned that since the debtor decided to assume the underlying ground lease and use the mobile home as a residence, the creditor was entitled to a higher figure – the true value of the living accommodation if sold as it stood. Comps in the creditor’s appraisal had relied upon the location of comparable mobile homes in order to establish value.

Judge Shannon rejected the creditor’s “in place” valuation, as this was contrary to the Supreme Court holding in Associates Commercial Corporation v. Rash 520 US 953 (1997), which adopted replacement value as the appropriate standard. The judge reasoned that the creditor did not have an interest in the land and the debtors alone were responsible for the ground lease payments. The Court reasoned that the creditor would receive the economic benefit of value only by way of the debtor’s continued expenditure of time and money post confirmation. In effect, such a ruling would provide the creditor with the economic benefit of a cost that it did not pay for or finance. Additionally, a lien on the ground lease would not extend to the creditor under state law.

The Court determined two flaws in the creditor’s analysis. The Supreme Court in Rash expressly rejected the use of a “foreclosure value” and adopted the replacement value when examining the cramdown standard. The Court found that in ruling otherwise, there would be no attribution to the debtor, who may wish to simply surrender the property rather than retain it. The Court also held that 11 U.S.C. Section 506 (a) (2) was directly applicable and provides that the replacement value means the “price a retail merchant would charge.”

In addition, the Court noted that the creditor’s security interest in the debtor’s mobile home was limited to the mobile home itself, as determined by the loan agreement. Pursuant to the TILA disclosure, the creditor was simply obtaining a security interest in the mobile home. On the TILA disclosure there was a box for “Real Estate.” This box was not checked. Instead, the creditor checked the other box that described “Mobile Home” as the sole collateral.

Since the debtor’s plan proposed paying $300 per month for the ground lease where the mobile home was located, the creditor did not have a security interest in the ground lease, nor the land, as indicated by the creditor’s own loan documents. Thus, the court reasoned, by permitting the creditor to use the mobile home’s location, the creditor sought an economic advantage that was unfair. It was simply unreasonable to allow the favorable comps relied upon by the creditor’s appraisal to include the value attributable by the ground lease’s location.

While the case reviewed in this blog is a Delaware District Court Bankruptcy case, the reasoning of the Court is correct, as both the Rash decision and section 11 U.S.C. Section 506(a) (2) strongly support that holding. In valuing a mobile home subject to a ground lease, for purpose of a cramdown, only the retail value is relevant. Courts will then often rely upon an industry-standard such as the NADA Retail Value Guidebook for Manufactured Mobile Homes to establish the cramdown value as Judge Shannon did.

COPYRIGHT © 2020, STARK & STARKNational Law Review, Volume V, Number 316

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