Winthrop Old Farm Nurseries, Inc., In re

• Decision Date: 10 January 1995
• Docket Number: No. 94-2025,94-2025
• Citation: 50 F.3d 72
• Parties: , 33 Collier Bankr.Cas.2d 113, 26 Bankr.Ct.Dec. 1191, Bankr. L. Rep. P 76,426 In re WINTHROP OLD FARM NURSERIES, INC., Debtor. WINTHROP OLD FARM NURSERIES, INC., Appellant, v. NEW BEDFORD INSTITUTION FOR SAVINGS, et al., Appellees. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 72

50 F.3d 72

63 USLW 2623, 33 Collier Bankr.Cas.2d 113,

26 Bankr.Ct.Dec. 1191, Bankr. L. Rep. P 76,426

In re WINTHROP OLD FARM NURSERIES, INC., Debtor.

WINTHROP OLD FARM NURSERIES, INC., Appellant, v. NEW BEDFORD INSTITUTION FOR SAVINGS, et al., Appellees.

No. 94-2025.

United States Court of Appeals, First Circuit.

Heard Jan. 10, 1995.

Decided March 22, 1995.

Stephen E. Shamban with whom Ann Brennan and Stephen E. Shamban Law Offices, P.C., Braintree, MA, were on brief, for appellant.

Richard M. Peirce with whom Roberts, Carroll, Feldstein & Peirce, Inc., Providence, RI, was on brief, for appellees.

Before SELYA, BOUDIN and STAHL, Circuit Judges.

STAHL, Circuit Judge.

Chapter 11 debtor Winthrop Old Farm Nurseries, Inc. ("Winthrop"), appeals the district court order affirming the bankruptcy court's decision that, to determine the status of the claim of undersecured junior mortgagee New Bedford Institution for Savings ("NBIS") pursuant to 11 U.S.C. Sec. 506(a), Winthrop's real property (the "Property") should be valued at its fair market value. We affirm.

I. BACKGROUND

Winthrop operates a retail garden shop and commercial landscaping business on the Property, located at 462 Winthrop Street in Rehoboth, Massachusetts. On February 2, 1993, Winthrop filed a petition for relief under Chapter 11 of the Bankruptcy Code (the "Code"). On July 16, 1993, Winthrop filed its Disclosure Statement and Plan of Reorganization (the "Plan"). The Plan provides that Winthrop will retain all of its assets except for the Property, which is to be transferred to a new entity apparently controlled by Winthrop's principal, which will in turn lease it back to Winthrop. Thus, under the Plan, Winthrop effectively retains control of the Property and its use.

The Property is encumbered by a first mortgage in the amount of $287,000 held by Northeast Savings, F.A., and by tax liens of approximately $20,000. NBIS, the holder of a junior mortgage on the Property, is owed approximately $576,000. The parties stipulated to a liquidation value for the Property of $300,000 and a fair market value of $400,000. Winthrop's Plan would transfer the Property to the new entity free and clear of all liens except for the Northeast Savings mortgage. The Plan would "strip down" the NBIS mortgage to the liquidation value of the Property, leaving NBIS's claim entirely unsecured. The Plan proposes a payout of twenty cents on the dollar over a four-year period to unsecured creditors, whose claims, including NBIS's, total approximately $756,761.

NBIS objected to the Plan, claiming that the Property should be valued at fair market value, not liquidation value. If the Property is valued at fair market value, NBIS would have a secured claim in the amount of approximately $100,000, with the remainder of its claim unsecured.

The bankruptcy court, citing a line of cases holding that fair market or going concern value is the appropriate standard in valuing collateral that a Chapter 11 debtor proposes to retain and use, granted NBIS's motion and valued the Property at $400,000. The district court affirmed, and Winthrop now appeals.

II. STANDARD OF REVIEW

"In an appeal from district court review of a bankruptcy court order, we independently review the bankruptcy court's decision, applying the 'clearly erroneous' standard to findings of fact and de novo review to conclusions of law." Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26, 30 (1st Cir.1994). Thus, our review is de novo. The bankruptcy court's interpretation of Sec. 506(a) presents a question of law. Its application of the statute to the particular facts of this case poses a mixed question of law and fact, subject to the clearly erroneous standard, unless the bankruptcy court's analysis was "infected by legal error." Williams v. Poulos, 11 F.3d 271, 278 (1st Cir.1993).

III. DISCUSSION

Section 506(a) governs the determination of whether any portion of a creditor's claim should be classified as a secured claim:

(a) An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor's interest or the amount so subject to setoff 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, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor's interest.

11 U.S.C. Sec. 506(a) (emphasis added). The statute does not direct courts to choose any particular valuation standard in a given type of case. As evidenced by the emphasized language in the statute's second sentence, Congress apparently did not intend that courts would use either a liquidation or fair Subsection (a) of [Sec. 506] separates an undersecured creditor's claim into two parts--he has a secured claim to the extent of the value of his collateral; he has an undersecured claim for the balance of his claim. "Value" does not necessarily contemplate forced sale or liquidation value of the collateral; nor does it imply a full going concern value. Courts will have to determine value on a case-by-case basis, taking into account the facts of each case and the competing interests in the case.

market value standard exclusively, envisioning instead a flexible approach by which courts would choose a standard to fit the circumstances. Relevant legislative history buttresses this notion. The House Report states:

H.R.Rep. No. 595, 95th Cong., 1st Sess. 356 (1977), reprinted in 1978 U.S.C.C.A.N. 5787, 6312 (emphasis added). The Senate Report's commentary on Sec. 506 offers little insight, but its commentary on Sec. 361--the Code section that provides for adequate protection payments to secured creditors in some circumstances--is further evidence that Congress intended that courts would sometimes value collateral at something greater than its liquidation price:

Neither is it expected that the courts will construe the term value to mean, in every case, forced sale liquidation value or full going concern value. There is wide latitude between those two extremes although forced sale liquidation value will be a minimum.

In any particular case, especially a reorganization case, the determination of which entity should be entitled to the difference between the going concern value and the liquidation value must be based on equitable considerations arising from the facts of the case.

S.Rep. No. 989, 95th Cong., 2d Sess. 54 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5840 (emphasis added). Although this commentary is not specifically addressed to Sec. 506(a), it is nevertheless relevant, since a valuation for Sec. 361 purposes necessarily looks to Sec. 506(a) for a determination of the amount of a secured claim. ¹ Indeed, since adequate protection payments immediately deplete the estate's assets--even before it is certain that a reorganization plan will be confirmed--one would expect that the valuation standard used to determine whether such payments are justified should be extremely conservative. See In re Case, 115 B.R. 666, 670 (9th Cir. BAP 1990) (stating in dictum that in a valuation for adequate protection purposes, "forced liquidation would be assumed and a deduction for selling costs would be logical"). Nevertheless, the Senate language suggests that even in a Sec. 361 context, a court might value collateral at something more than its liquidation value.

We have not previously considered this issue. A number of courts, however, including four Circuit Courts, have adhered to this clear expression of congressional intent and declined to value collateral that a debtor proposes to retain based on a hypothetical foreclosure sale. These courts reason that because the reorganizing debtor proposes to retain and use the collateral, it should not be valued as if it were being liquidated; rather, courts should value the collateral "in light of" the debtor's proposal to retain it and ascribe to it its going-concern or fair market value with no deduction for hypothetical costs of sale. ²

Other courts, however, have chosen to read Sec. 506(a) as requiring in virtually all cases a valuation of collateral limited to the net amount a secured creditor could recover if it We are persuaded that the first line of cases correctly interprets the statute. This interpretation gives meaning to both sentences of Sec. 506(a), and enables bankruptcy courts to exercise the flexibility Congress intended. By retaining collateral, a Chapter 11 debtor is ensuring that the very event Winthrop proposes to use to value the property--a foreclosure sale--will not take place. At the same time, the debtor should not be heard to argue that, in valuing the collateral, the court should disregard the very event that, according to the debtor's plan, will take place--namely, the debtor's use of the collateral to generate an income stream. In ordinary circumstances the present value of the income stream would be equal to the collateral's fair market value. Under such circumstances, a court remains faithful to the dictates of Sec. 506(a) by valuing the creditor's interest in the collateral in light of the proposed post-bankruptcy reality: no foreclosure sale and economic benefit for the debtor derived from the collateral equal to or greater than its fair market value. Our approach allows the bankruptcy court, using its informed discretion and applying historic principles of equity, to adopt in each case the The interpretation championed by the second line of cases renders the second sentence of Sec. 506(a) virtually meaningless. Moreover, it would allow a reorganizing debtor to reap a windfall...