USCA1 Opinion
April 3, 1995
United States Court of Appeals United States Court of Appeals
For the First Circuit For the First Circuit
____________________
No. 94-2025
IN RE WINTHROP OLD FARM NURSERIES, INC.,
Debtor.
_____________________
WINTHROP OLD FARM NURSERIES, INC.,
Appellant,
v.
NEW BEDFORD INSTITUTION FOR SAVINGS, ET AL.,
Appellees.
____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Richard G. Stearns, U.S. District Judge] ___________________
____________________
Before
Selya, Boudin and Stahl,
Circuit Judges. ______________
____________________
ERRATA SHEET ERRATA SHEET
Please make the following change to the opinion issued on March
22, 1995.
Page 3, first full paragraph, line 3 - change "far" to
"fair"
United States Court of Appeals United States Court of Appeals
For the First Circuit For the First Circuit
____________________
No. 94-2025
IN RE WINTHROP OLD FARM NURSERIES, INC.,
Debtor.
_____________________
WINTHROP OLD FARM NURSERIES, INC.,
Appellant,
v.
NEW BEDFORD INSTITUTION FOR SAVINGS, ET AL.,
Appellees.
____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Richard G. Stearns, U.S. District Judge] ___________________
____________________
Before
Selya, Boudin and Stahl,
Circuit Judges. ______________
____________________
Stephen E. Shamban with whom Ann Brennan and Stephen E. Shamban ___________________ ____________ __________________
Law Offices, P.C. were on brief for appellant. _________________
Richard M. Peirce with whom Roberts, Carroll, Feldstein & Peirce, __________________ _____________________________________
Inc. was on brief for appellees. ____
____________________
March 22, 1995
____________________
STAHL, Circuit Judge. Chapter 11 debtor Winthrop STAHL, Circuit Judge. _____________
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. 506(a), Winthrop's real property (the
"Property") should be valued at its fair market value. We
affirm.
I. I. __
BACKGROUND 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
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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. II. ___
STANDARD OF REVIEW STANDARD OF REVIEW __________________
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"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 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. III. ____
DISCUSSION 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 ______________________
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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. 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 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:
Subsection (a) of [ 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. _____________________
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 506 offers little
insight, but its commentary on 361 -- the Code section that
provides for adequate protection payments to secured
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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 506(a), it is
nevertheless relevant, since a valuation for 361 purposes
necessarily looks to 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 ___ __________
____________________
1. See United Sav. Ass'n of Tex. v. Timbers of Inwood Forest ___ _________________________ ________________________
Assoc., 484 U.S. 365, 371-72 (1988) (stating that statutory ______
construction is a "holistic endeavor" and defining value of
"entity's interest in property" entitled to adequate
protection under 361 and 362 in light of meaning of value
of "creditor's interest" in property under 506(a)).
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(Bankr. 9th Cir. 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 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
____________________
2. See, e.g., In re McClurkin, 31 F.3d 401, 405 (6th Cir. ___ ____ _______________
1994) (holding that 506(a) "does not require or permit a
reduction in the creditor's secured claim to account for
purely hypothetical costs of sale" of Chapter 13 debtor's
residence); Matter of Rash, 31 F.3d 325, 329-31 (5th Cir. _______________
1994) (holding that truck to be retained by Chapter 13 debtor
must be valued at replacement cost to debtor because
foreclosure value fails to account for debtor's proposed use
of collateral); Lomas Mortgage USA v. Wiese, 980 F.2d 1279, __________________ _____
1284-86 (9th Cir. 1992) (holding that second sentence of
506(a) precludes deduction of hypothetical costs of sale in
valuing Chapter 13 debtor's real property to be retained by
debtor), cert. granted and judgment vacated on other grounds, ___________________________________________________
113 S. Ct. 2925 (1993) (remanding for reconsideration in
light of Nobleman v. American Sav. Bank, 113 S. Ct. 2106 ________ ___________________
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Other courts, however, have chosen to read 506(a)
as requiring in virtually all cases a valuation of collateral
limited to the net amount a secured creditor could recover if
it seized or foreclosed on the collateral and disposed of it
in accordance with applicable state law.3 These courts tie
____________________
(1993)); In re Balbus, 933 F.2d 246, 252 (4th Cir. 1991) _____________
(same); In re Case, 115 B.R. 666, 670 (Bankr. 9th Cir. 1990) __________
(holding that for Chapter 12 plan confirmation purposes,
hypothetical costs should not be deducted from fair market
value in valuing collateral to be retained by debtor); In re _____
Arnette, 156 B.R. 366, 368 (Bankr. D. Conn. 1993) (holding _______
that motor vehicle to be retained by chapter 13 debtor
"should be valued at the price the debtor could get for it in
a free and open market, i.e. its fair market value"); In re _____
Green, 151 B.R. 501 (Bankr. D. Minn. 1993) (valuing car to _____
be retained by Chapter 13 debtor at retail, rather than
wholesale value); Matter of Savannah Gardens-Oaktree, 146 ____________________________________
B.R. 306, 310 (Bankr. S.D. Ga. 1992) (using fair market value
to value apartment complex in Chapter 11 adequate protection
context); In re Usry, 106 B.R. 759, 762 (Bankr. M.D. Ga. ___________
1989) (in light of fact that Chapter 11 and Chapter 12
debtors plan to retain collateral to produce income, secured
claim equaled amount of stipulated fair market value without
deduction for hypothetical liquidation costs); cf. In re ___ ______
Davis, 14 B.R. 226 (Bankr. D. Me. 1981) ("Where a confirmed _____
chapter 11 reorganization plan contemplates retention of the
collateral by the debtor for use in its ongoing business
operations, collateral . . . should be ascribed its fair
market value[,]" but reasonable costs of sale deducted in
valuing security interest) (Cyr, J.).
3. See, e.g., In re Demakes Enters., Inc., 145 B.R. 362, 365 ___ ____ ___________________________
(Bankr. D. Mass. 1992) (valuing meat processing plant at
liquidation value); In re Ledgemere Land Corp., 125 B.R. 58, __________________________
61 (Bankr. D. Mass. 1991) (bank's mortgage on Chapter 11
debtor's real property that debtor intended to retain and
eventually develop "is worth only what [property] will bring
at foreclosure"); In re Robbins, 119 B.R. 1, 5 (Bankr. D. ______________
Mass. 1990) (valuing Chapter 11 debtor's investment property
at foreclosure value); In re T.H.B. Corp., 85 B.R. 192, 196 ___________________
(Bankr. D. Mass. 1988) ("The fact that the Debtor is a going
concern is no reason to value the collateral under the going
concern standard unless it appears likely that the secured
party will actually receive that value from its collateral
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their interpretation to the first sentence of 506(a),
reasoning that even if the debtor proposes to retain and make
profitable use of the collateral in the reorganized
enterprise, the statute commands a valuation of the
"creditor's interest" in the property -- i.e., of the lien -- ____
and that value can only reflect what the creditor would be
entitled to recover from the collateral under non-bankruptcy
law. Thus, if the collateral is subject to the Uniform
Commercial Code, the creditor's interest would reflect what
it could recover from a commercially reasonable sale under
the U.C.C.; if real estate, then from a foreclosure sale,
perhaps with some value added if the creditor has the right
and the wherewithal to bid-in, hold and resell the property
on the open market. See, e.g., In re Tenney Village Co., 104 ___ ____ ________________________
B.R. 562, 567 (Bankr. D.N.H. 1989) (valuing property at fair
market value because mortgage holder had ability to bid in
and obtain fair market value through later private sales); In __
re Robbins, 119 B.R. 1, 5-6 (Bankr. D. Mass. 1990) ___________
(recognizing second mortgage holder's bid-in rights but
declining to ascribe any value to them where circumstances
make it "unreasonable to expect" creditor to exercise them);
see generally James F. Queenan, Jr., Standards for Valuation ___ _________ _______________________
of Security Interests in Chapter 11, 92 Com. L.J. 18, 60 ______________________________________
____________________
through a pending sale.")
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(1987) (real estate mortgage holder's bid-in rights "should
be valued as an inherent part of his property interest").
We are persuaded that the first line of cases
correctly interprets the statute. This interpretation gives
meaning to both sentences of 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 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 valuation method that is fairest given the
prevailing circumstances.
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The interpretation championed by the second line of
cases renders the second sentence of 506(a) virtually
meaningless. Moreover, it would allow a reorganizing debtor
to reap a windfall by stripping down the lien to liquidation
value and quickly selling the collateral at fair market
value, thus pocketing equity that would have been completely
beyond reach save for the filing of the bankruptcy petition.
Cf. Butner v. United States, 440 U.S. 48, 55 (1979) ___ ______ ______________
(bankruptcy law should "prevent a party from receiving a
windfall merely by reason of the happenstance of bankruptcy")
(quotation omitted). It is true that the debtor's intention
to reorganize under Chapter 11 is what gives the collateral
its going-concern value. And while it is also true that,
absent a reorganization plan, the creditor might not recover
the difference -- assuming that there is in fact a difference
-- between the collateral's fair market value and the amount
recoverable through its state law rights, we would not
characterize this additional recovery as a "windfall" to the
creditor, and certainly not one that will spur secured
creditors to eschew their state law remedies and seek refuge
in the comfortable confines of the bankruptcy courts.
We find that the bankruptcy court correctly
interpreted 506(a) as according it flexibility in choosing
among possible standards of valuation, and properly applied
the statute to the particular facts of this case. Winthrop
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proposes in its Plan to retain control of the Property and
continue using it in its nursery and landscaping business to
generate income. In light of this proposed use, the
bankruptcy court committed no error in valuing the Property
at its stipulated fair market value.
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IV. IV. ___
CONCLUSION CONCLUSION __________
For the foregoing reasons, the order of the
district court is
Affirmed. Affirmed ________
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