In Re Heritage Highgate, Inc.

PRECEDENTIAL

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________

No. 11-1889
_____________

In re: Heritage Highgate, Inc. and
Heritage Twin Ponds, L.P.,
Debtors

Charles Scagliotti IRA, Frank Cortese IRA,
Gerald Bowes IRA, Gary Cortese IRA,
George Mee Marital Trust, TomParks IRA,
Pollock Family L.P., Robert Preston IRA,
John Rogers, Lynne Summers Marital Trust,
John R. Yaissle IRA,
Yee III Trust Highgate and Robert Preston
(collectively "Cornerstone Investors"),
Appellants
_____________

Appeal from the United States District Court
for the District of New Jersey
(D.C. Civil No. 1-10-cv-02837)
District Judge: Honorable Jerome B. Simandle
_____________

Argued March 20, 2012
 Before: RENDELL, FISHER and
CHAGARES, Circuit Judges

(Opinion Filed: May 14, 2012)
_____________

Albert A. Ciardi, III, Esq.
Nicole M. Nigrelli, Esq.
Ciardi Ciardi & Astin
2005 Market Street
One Commerce Square, Suite 1930
Philadelphia, PA 19103
Counsel for Debtors

Joseph S. D‟Amico, Jr., Esq.
Douglas J. Smillie, Esq. [ARGUED]
Fitzpatrick, Lentz & Bubba
4001 Schoolhouse Lane
Stabler Corporate Center, P.O. Box 219
Center Valley, PA 18034
Counsel for Plaintiff-Appellant
Cornerstone Investors

Samuel H. Israel, Esq. [ARGUED]
Joshua T. Klein, Esq.
Michael G. Menkowitz, Esq.
Fox Rothschild
2000 Market Street, 20th Floor
Philadelphia, PA 19103

2
Michael J. Viscount, Jr., Esq.
Fox Rothschild
1301 Atlantic Avenue
Suite 400, Midtown Building
Atlantic City, NJ 08401
Counsel for Defendant –Appellee
Unsecured Creditors Committee
_____________

OPINION OF THE COURT
_____________

RENDELL, Circuit Judge.

This appeal requires us to decide how bankruptcy
courts should value collateral retained by a Chapter 11 debtor
in order to determine the amount of a creditor‟s secured claim
under 11 U.S.C. § 506(a). Appellants, a group of creditors
known as the Cornerstone Investors, claim that the
Bankruptcy Court erred by valuing their secured claims at
zero based on an appraisal of Debtors‟ real estate offered by
the Official Committee of Unsecured Creditors. We conclude
that the Bankruptcy Court did not err in its valuation of the
real estate, and that it properly determined that the
Cornerstone Investors held only unsecured claims. In so
concluding, we also clarify the burden of proof with respect
to such valuations in the § 506(a) context.

I. Background

Debtors Heritage Highgate, Inc. and Heritage-Twin
Ponds II, L.P. embarked upon the development of a
residential subdivision in Lehigh County, Pennsylvania (the

3
“Project”) in August 2005. The Project was to consist of
townhouses and single-family detached homes.

Debtors entered into a series of construction loan
agreements, first borrowing from a group of banks led by
Wachovia (the “Bank Lenders”). Pursuant to their
agreement, the Bank Lenders retained a lien on substantially
all of Debtors‟ assets as collateral for the loan. Debtors
subsequently borrowed from several individuals and entities,
known collectively as the Cornerstone Investors. Pursuant to
those agreements, the Cornerstone Investors similarly
received liens, of equal priority with the Bank Lenders and
each other, on substantially all of Debtors‟ assets. The
Cornerstone Investors, however, later agreed to subordinate
their secured claims to the secured claim of the Bank Lenders
in a set of intercreditor agreements.

On January 20, 2009, after building and selling
approximately a quarter of the planned units, Debtors filed
voluntary petitions for relief under Chapter 11 of the
Bankruptcy Code. On June 9, 2009, Debtors filed a joint
proposed plan of reorganization, which provided that they
would complete development of the subdivision and make
distributions to their creditors according to a set of
projections. In the initial proposed plan, Debtors projected
that they would first pay the secured claim of the Bank
Lenders in full, then pay the secured claims of the
Cornerstone Investors in full, and thereafter pay all unsecured
claims at a rate of approximately 20% each, from the funds
earned through lot sales.

4
 In connection with a contested cash collateral hearing,1
Debtors offered an appraisal of the Project prepared by an
experienced real estate appraisal company, Reaves C. Lukens,
in February 2009 to demonstrate the worth of their collateral.
The 140-page appraisal set forth in detail the company‟s
estimation of the real estate development‟s fair market value
pursuant to two well-accepted appraisal methodologies, the
sales comparison approach and the income capitalization
approach.2 According to the appraiser, both analyses “were

1
Cash collateral includes “cash, negotiable
instruments, documents of title, securities, deposit accounts,
or other cash equivalents . . . in which the estate and any
entity other than the estate have an interest and includes the
proceeds, products, offspring, rents, or profits of property.”
11 U.S.C. § 363(a). To continue using the cash collateral of a
secured lender, a Chapter 11 debtor must either obtain
consent from the secured lender or obtain the Bankruptcy
Court‟s authorization. Id. § 363(c)(2). In the event a secured
creditor does not consent and the Bankruptcy Court‟s
authorization is sought in a contested hearing, the Chapter 11
debtor must demonstrate that the secured creditor is
adequately protected. Id. § 363(e), (p). Forms of adequate
protection are set forth at 11 U.S.C. § 361, and include other
collateral that has value in excess of the secured creditor‟s
claim or a budget that provides for the continued operation of
the debtor‟s business without detriment to the secured
lender‟s position.
2
The sales comparison approach and income
capitalization approach are two techniques frequently used by
appraisers in arriving at the fair market value of land. See In
re Tamarack Trail Co., 23 B.R. 3, 5 (Bankr. S.D. Ohio 1982)

5
well supported by market evidence” and yielded virtually
identical estimations. The appraiser favored the results of the
latter because it “more accurately considered the time and
expenses” related to a real estate development like the
Project. The Bankruptcy Court accepted the appraiser‟s
calculation of the Project‟s fair market value as
approximately $15 million, which was then sufficient to cover
the entirety of the secured debt.

On September 4, 2009, the Official Committee of
Unsecured Creditors (the “Committee”) filed a motion to
value the secured claims of the Cornerstone Investors
pursuant to 11 U.S.C. § 506(a) and Federal Rule of
Bankruptcy Procedure 3012. The Committee claimed that the
Bankruptcy Court should value the secured claims at zero
because the collateral securing the Cornerstone Investors‟
liens, the Project, was worth less than the Bank Lenders‟
senior secured claim. As proof of the collateral‟s worth, the
Committee submitted the February 2009 appraisal previously
accepted by the Bankruptcy Court as evidence of the Project‟s
fair market value at the contested cash collateral hearing.
However, when reduced by interim sales, the fair market

(noting that there are “three appraisal techniques . . . available
to appraisers,” two of which are the sales comparison and
income capitalization approaches). The sales comparison
approach is a method of analyzing sales of similar recently
sold parcels to arrive at a probable sale price for the property
being appraised. The income capitalization approach is a
method in which the appraiser estimates the value of land
based upon the present value of the income stream to be
generated by the sale of the individual lots within the
development over an estimated holding period.

6
value was approximately $9.54 million.3 The Committee
urged that, because this amount was insufficient to pay the
Bank Lenders in full, the secured claims of the Cornerstone
Investors were valueless. In response, the Cornerstone
Investors argued that their claims should be deemed wholly
secured because projections that accompanied the plan filed
by Debtors estimated that Debtors would derive revenue from
the Project sufficient to pay their claims in full. The parties
agreed to postpone consideration of the motion until after
confirmation of the reorganization plan.

On March 2, 2010, Debtors submitted their final plan
of reorganization. The plan specified that claims of the
Cornerstone Investors would be secured to the extent
determined by the Bankruptcy Court in ruling on the
Committee‟s motion. The final plan included a projected
budget that anticipated full payment of both the Bank
Lenders‟ senior secured debt and the Cornerstone Investors‟
junior secured debt through the development and sale of lots
with completed townhouses and single-family homes over the
course of 47 months. According to the budget, unsecured
claimants would receive distributions amounting to
approximately 45% of their claims. No interested party,
including the Cornerstone Investors, objected to Debtors‟
final plan of reorganization. On April 1, 2010, the
Bankruptcy Court entered an order confirming the plan. The
Bankruptcy Court concluded, as required by 11 U.S.C. §
1129(a)(11), that the plan was feasible, i.e., that further

3
Sales following the appraisal generated approximately
$5.45 million in proceeds, which were used to fund
operations, including payment of some principal and interest
to the Bank Lenders.

7
liquidation or reorganization beyond the plan‟s provisions
would be unlikely.

With the plan confirmed, the Bankruptcy Court took
up the Committee‟s motion to value the Cornerstone
Investors‟ secured claims. On April 14, 2010, the parties
filed joint stipulations of fact to assist the Bankruptcy Court
in ruling on the motion. They agreed that the Bank Lenders
were then owed approximately $12 million, while the
Cornerstone Investors were owed approximately $1.4 million.
Debtors and the Cornerstone Investors stipulated that the
appraised value of the Project should be reduced due to
Debtors‟ sale of lots since the appraisal‟s completion on
February 21, 2009, and that, “[b]ased on the Appraisal, the
total fair market value of the Project as of the Confirmation
Date [wa]s $9,543,396.23.” Additional assets held by
Debtors raised the total value of the collateral securing liens
to $11,165,477.15.

On May 3, 2010, the Bankruptcy Court held a hearing
on the Committee‟s motion. At the hearing, the Committee
reiterated its argument that the appraisal, as adjusted,
reflected the worth of the Project in accordance with § 506(a)
— namely, its fair market value as of confirmation. The
appraisal, argued the Committee, demonstrated that the fair
market value was less than the Bank Lenders‟ secured claim,
such that no value remained to secure the Cornerstone
Investors‟ liens. While they agreed that the appraisal
depicted the Project‟s fair market value, the Cornerstone
Investors contended that it did not control because § 506(a)
requires that the value of property “be determined in light of
[its] proposed disposition or use” and the plan budget
demonstrated that the Debtors would be able to pay their
claims in full over time as more homes were sold. They also

8
urged the court to adjudge their claims fully secured, arguing
that to deprive them of Project revenue to be generated over
and above the appraisal value would constitute impermissible
lien stripping.

The Bankruptcy Court agreed with the Committee. It
determined that the proper method of valuing the Cornerstone
Investors‟ secured claims was the fair market value of the
Project as of the plan‟s confirmation date. The Cornerstone
Investors did not dispute the accuracy of the fair market value
set forth in the appraisal, choosing instead to rely upon the
plan budget. The Bankruptcy Court accepted the appraisal as
a proper basis for the valuation. Because the amount
remaining due on Debtors‟ obligation to the Bank Lenders
exceeded the sum of the Project‟s fair market value and the
value of other assets held by Debtors, no collateral remained
to secure the Cornerstone Investors‟ claims. Therefore, the
Bankruptcy Court ruled, the Cornerstone Investors would be
treated as unsecured creditors.

The Cornerstone Investors appealed the Bankruptcy
Court‟s ruling to the District Court for the District of New
Jersey. The District Court affirmed the Bankruptcy Court‟s
ruling. Relying upon the Supreme Court‟s decision in
Associates Commercial Corp. v. Rash, 520 U.S. 953 (1997), it
considered the Project‟s fair market value controlling and
found the appraisal to have accurately measured that value.
The District Court rejected the Cornerstone Investors‟
suggestion that the plan budget constituted the appropriate
basis for valuing their secured claims because they knew that
the amount of their secured claims would be determined
pursuant to the Committee‟s motion, as the plan specifically
so stated. The plan budget, the District Court stated, merely
constituted projections meant to demonstrate the plan‟s

9
feasibility, not the Project‟s present value. The District Court
noted that, while the Supreme Court has prohibited lien
stripping in liquidation cases, see Dewsnup v. Timm, 502 U.S.
410 (1992), nothing prohibited lien stripping in the
reorganization context.

This timely appeal followed. The Cornerstone
Investors make two interrelated arguments, emphasizing
throughout that § 506(a) requires that property be valued “in
light of . . . [its] proposed disposition or use.” First, the
Cornerstone Investors contend that the Project‟s discounted
present value, as reflected in the appraisal, cannot control the
extent to which their claims are secured because the plan calls
for Debtors to develop and sell homes in the subdivision over
time. The Bankruptcy Court, the argument proceeds, could
only have valued the Project in a manner respectful of its
“proposed disposition or use” by awaiting the results of the
planned build-out. Second, the Cornerstone Investors
contend that, by pinning a value to the Project prior to the
plan‟s completion in violation of § 506(a)‟s dictates, the
Bankruptcy Court denied them revenue that would ultimately
be realized from the Project in excess of its appraisal value.
They urge that depriving them of any increase in the worth of
their collateral beyond its judicially determined value violates
restrictions on lien stripping imposed by the Supreme Court
in Dewsnup.

After briefly turning to the burden of proof, we address
each aspect of the Cornerstone Investors‟ argument in turn.

II. Jurisdiction and Standard of Review

The Bankruptcy Court had jurisdiction over the instant
dispute pursuant to 28 U.S.C. § 1334. The District Court had

10
jurisdiction to review the final order of the Bankruptcy Court
pursuant to 28 U.S.C. § 158(a). We have jurisdiction
pursuant to 28 U.S.C. § 158(d).

“Because the District Court sat as an appellate court,
reviewing an order of the Bankruptcy Court, our review of the
District Court‟s determinations is plenary.” In re Rashid, 210
F.3d 201, 205 (3d Cir. 2000), superseded on other grounds as
stated in In re Warfel, 268 B.R. 205, 212 n.7 (B.A.P. 9th Cir.
2001). In reviewing the Bankruptcy Court‟s determinations,
we exercise the same standard of review as did the District
Court. Fellheimer, Eichen & Braverman, P.C. v. Charter
Techs., Inc., 57 F.3d 1215, 1223 (3d Cir. 1995). Accordingly,
the Bankruptcy Court‟s findings of fact are reviewed only for
clear error, while legal determinations are reviewed de novo.
In re Engel, 124 F.3d 567, 571 (3d Cir. 1997).

III. Discussion

A. Burden-Shifting Framework

Neither the Code nor the Federal Rules of Bankruptcy
Procedure allocates the burden of proof as to the value of
secured claims under § 506(a). In the absence of explicit
direction, courts have arrived at divergent formulations.
Although neither the Bankruptcy Court nor the District Court
considered this issue, addressing it informs our review of the
question on appeal and provides guidance to courts generally.
Accordingly, we requested supplemental briefing on the
issue. We now hold that a burden-shifting framework
controls valuations of collateral to decide the extent to which
claims are secured pursuant to § 506(a).

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 Three approaches to the burden of proof in
proceedings to value secured claims under § 506(a) have
predominated in bankruptcy cases. Some courts have
concluded that the secured creditor bears the burden of proof.
See, e.g., In re Sneijder, 407 B.R. 46, 55 (Bankr. S.D.N.Y.
2009). Other courts have held that the party challenging the
value of a claim, usually the debtor, bears the burden of
proof. See, e.g., In re Weichey, 405 B.R. 158, 164 (Bankr.
W.D. Pa. 2009). A third group of courts has settled on a
burden-shifting analysis, pursuant to which “the debtor bears
the initial burden of proof to overcome the presumed validity
and amount of the creditor‟s secured claim,” but “the ultimate
burden of persuasion is upon the creditor to demonstrate by a
preponderance of the evidence both the extent of its lien and
the value of the collateral securing its claim.” In re
Robertson, 135 B.R. 350, 352 (Bankr. E.D. Ark. 1992).

“The circumstances will dictate the assignment of the
burden of proof on the question of value.” In re Young, 390
B.R. 480, 486 (Bankr. D. Me. 2008). Cognizant of this
principle, a burden-shifting approach strikes us as most
appropriate in the instant scenario. The initial burden should
be on the party challenging a secured claim‟s value, because
“11 U.S.C. § 502(a) and Bankruptcy Rule 3001(f) grant prima
facie effect to the validity and amount of a properly filed
claim.” In re Williams, 381 B.R. 742, 744 (Bankr. W.D. Ark.
2008). It is only fair, then, that the party seeking to negate
the presumptively valid amount of a secured claim — and
thereby affect the rights of a creditor — bear the initial
burden. See In re Brown, 244 B.R. 603, 609-10 (Bankr. W.D.
Va. 2000). If the movant establishes with sufficient evidence
that the proof of claim overvalues a creditor‟s secured claim
because the collateral is of insufficient value, the burden

12
shifts. The creditor thereafter bears “the ultimate burden of
persuasion . . . to demonstrate by a preponderance of the
evidence both the extent of its lien and the value of the
collateral securing its claim.”4 In re Robertson, 135 B.R. at
352.

Before applying the burden-shifting framework to this
dispute, we must first grapple with the two more fundamental
challenges raised by the Cornerstone Investors: that use of the
collateral‟s fair market value violated § 506(a)‟s “proposed
disposition or use” language; and, that the collateral‟s
increase in value after the § 506(a) valuation rightly accrues
to their benefit. That is because, if either contention is
correct, the appraisal would not have constituted a proper
basis for the Bankruptcy Court‟s ruling.

B. Section 506(a) Valuation Standards

Central to resolution of this matter is the text of
§ 506(a). It provides in pertinent part:

An allowed claim of a creditor
secured by a lien on property in
which the estate has an interest . .
. is a secured claim to the extent
of the value of such creditor‟s

4
Allocating the ultimate burden of persuasion to the
creditor whose proof of claim has been challenged is
consistent with the rest of the Code. “Throughout the Code,
the burden of proving the „validity, priority, and extent‟ of
security interests lies upon the creditors asserting such
interests.” In re Buick, 126 B.R. 840, 851 (Bankr. E.D. Pa.
1991).

13
 interest in the estate‟s interest in
such property . . . and is an
unsecured claim to the extent that
the value of such creditor‟s
interest . . . 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 . . . .

11 U.S.C. § 506(a) (emphasis added). The provision,
therefore, calls for the division of secured creditors‟ claims
into “secured and unsecured portions, with the secured
portion[s] of the claim[s] limited to the value of the
collateral.” Rash, 520 U.S. at 961.

Though the statute requires that collateral be valued, it
does not specify the appropriate valuation standard. See In re
Winthrop Old Farm Nurseries, Inc., 50 F.3d 72, 73-74 (1st
Cir. 1995) (“The statute does not direct courts to choose any
particular valuation standard in a given type of case.”).
According to a House Report on § 506(a), “„[v]alue‟ does not
necessarily contemplate forced sale or liquidation value of the
collateral; nor does it imply a full going concern value.” See
H.R. Rep. No. 95-595, at 356 (1977), reprinted in 1978
U.S.C.C.A.N. 5787, 6312. Rather, Congress envisioned a
flexible approach to valuation whereby bankruptcy courts
would choose the standard that best fits the circumstances of
a particular case. Id. (“Courts will have to determine the
value on a case-by-case basis, taking into account the facts of
each case and the competing interests in the case.”).
Congress did make at least one thing clear, though: “the

14
„proposed disposition or use‟ of the collateral is of paramount
importance to the valuation question.” Rash, 520 U.S. at 962.

If that language is to be afforded any significance,
then, the appropriate standard for valuing collateral must
depend upon what is to be done with the property — whether
it is to be liquidated, surrendered, or retained by the debtor.
In Rash, the Supreme Court considered how to value
collateral retained by a Chapter 13 debtor exercising the cram
down option in § 1325(a)(5)(B) of the Code. The Court
distinguished that option from the alternative available to the
Chapter 13 debtor — in which its collateral would be
surrendered to the objecting debtor — when deciding the
proper valuation standard under § 506(a).5 See id. at 962
(“The „disposition or use‟ of the collateral thus turns on the
alternative the debtor chooses . . . .”). When a debtor elects
“to use the collateral to generate an income stream” as in a
cram down, the Court noted, use of a foreclosure-value
standard would be improper because “a foreclosure sale . . .
will not take place.” Id. at 963. By contrast, the replacement-
value standard “values „the creditor‟s interest in the collateral
in light of the proposed [repayment plan] reality: no
foreclosure sale and economic benefit for the debtor derived
from the collateral equal to . . . its [replacement] value.‟” Id.
(quoting In re Winthrop Old Farm Nurseries, 50 F.3d at 75)

5
The Court considered three possible valuation
standards: “(1) what the secured creditor could obtain through
foreclosure sale of the property (the „foreclosure-value‟
standard); (2) what the debtor would have to pay for
comparable property (the „replacement-value‟ standard); or
(3) the mid-point between these two measurements.” Rash,
520 U.S. at 955-56.

15
(alterations in original). Accordingly, the Court held that
“under § 506(a), the value of property retained . . . is the cost
the debtor would incur to obtain a like asset for the same
„proposed use,‟” i.e., its replacement value.6 Id.

Courts have recognized that similar reasoning applies
with equal force in the Chapter 11 reorganization context.
See, e.g., In re Mayslake Village-Plainfield Campus, Inc., 441
B.R. 309, 320 n.2 (Bankr. N.D. Ill. 2010) (“The same
[replacement] value can be used in this matter, even though a
Chapter 11 cram down plan is involved.”). Where a Chapter
11 plan of reorganization provides for a debtor to retain and
use collateral to generate income with which to make
payments to creditors, a § 506(a) valuation based upon a
hypothetical foreclosure sale would not be appropriate, as it
would be inconsistent with the provision‟s dictates. “In
ordinary circumstances the present value of the income
stream would [instead] be equal to the collateral‟s fair market
value.” In re Winthrop Old Farm Nurseries, 50 F.3d at 75.
Indeed, the Rash Court considered its “use of the term
replacement value . . . consistent with . . . the meaning of fair-
market value” because both reflect “the price a willing buyer
in the debtor‟s trade, business, or situation would pay a
willing seller to obtain property of like age and condition.”
520 U.S. at 959 n.2. The proper measure under § 506(a) must

6
The Supreme Court expressly left “to bankruptcy
courts, as triers of fact, identification of the best way of
ascertaining replacement value on the basis of the evidence
presented.” Rash, 520 U.S. at 965 n.6.

16
therefore be the collateral‟s fair market value because it is
most respectful of the property‟s anticipated use.7

By contrast, the Cornerstone Investors urge a market-
based, or wait-and-see, approach to valuation of the Project.
They argue that if the property, when sold, will bring in
sufficient dollars to pay their secured claims in full, their
claims should reflect that value. They suggest that, because
Debtors will continue to develop and sell lots during the
plan‟s life, the extent to which their claims are secured should
similarly be calculated over time. To our knowledge,
however, under no circumstances has such an approach been
used, even when the collateral at issue was of a similar nature.
See, e.g., In re Tamarack Trail Co., 23 B.R. 3, 5-6 (Bankr.
S.D. Ohio 1982) (valuing a partially completed development
project based on the fair market value in its current
condition). Its absence is for good reason. A wait-and-see
approach would in effect do away with bankruptcy courts‟
obligation to determine value under § 506(a).8 That result is

7
Like the appropriate measure of fair market value, the
appropriate time as of which to value collateral may differ
depending on the facts presented. See King, 4 Collier on
Bankruptcy ¶ 506.03[10] (15th ed. rev. 2009) (discussing the
potentially relevant dates of valuation for purposes of
§ 506(a)). As with the replacement valuation technique,
bankruptcy courts are best situated to determine when is the
appropriate time to value collateral in the first instance. We,
therefore, defer to their considered judgment.
8
Federal Rule of Bankruptcy Procedure 3012 —
pursuant to which the Committee made its motion — allows
interested parties to request that a bankruptcy court value

17
at odds with the Bankruptcy Code. In § 506(a), Congress
expressly provided for the division of allowed claims
supported by liens into secured and unsecured portions during
the reorganization, before the plan‟s success or failure is
clear. The fact that its “proposed disposition or use” should
be factored into the valuation does not mean that the time as
of which property is valued is to be postponed or altered.

Both the Bankruptcy Court and the District Court
accurately characterized the budget as simply a set of
projections offered in support of the plan‟s feasibility, i.e., to
demonstrate that the plan would have a “reasonable
probability” of success. See In re TCI 2 Holdings, LLC, 428
B.R. 117, 148 (Bankr. D.N.J. 2010) (“The key element of
feasibility is whether there is a reasonable probability the
provisions of the plan can be performed.”). It was not
intended to function as anything more, and most certainly not
as a determination of the value of the Cornerstone Investors‟
interest in the Project. This is clear from the fact that the plan
expressly states that the amount of their secured claims will
be determined by the Bankruptcy Court pursuant to the
Committee‟s motion. More fundamentally, the projections
regarding monies to be realized from the sale of lots over time
do not equate to “value” as of confirmation because they
anticipate Debtors spending time and money to realize value

claims and therefore necessarily requires that collateral‟s
worth be affixed in advance of a reorganization‟s completion.
Parties like the Committee would have very little, if any,
reason to make such motions for valuations pursuant to Rule
3012 if bankruptcy courts adopted the approach here urged by
the Cornerstone Investors. This is further reason to reject it
as discordant with bankruptcy practice.

18
at a later date. That future value should not be credited to the
secured creditor at confirmation. A “probability” of realizing
the budget is not a certainty of its realization. In sum,
valuations must be based upon realistic measures of present
worth.

Applying these precepts to the matter at hand, we hold
that the Bankruptcy Court properly concluded that the fair
market value of the Project as of the confirmation date
controls whether the Cornerstone Investors‟ claims are
secured or not. That is because the confirmed plan of
reorganization called for Debtors to retain ownership of the
real estate subdivision in order to complete its development.
The discounted fair market value of the property as of the
confirmation date, therefore, best approximated just how
secure the liens held by creditors — namely, the Bank
Lenders and Cornerstone Investors — were at the relevant
point in Debtors‟ bankruptcy.9 Because, as the Cornerstone

9
“[T]he value of the property should be determined as
of the date to which the valuation relates.” In re Savannah
Gardens-Oaktree, 146 B.R. 306, 308 (Bankr. S.D. Ga. 1992).
“Where, as here, the purpose of the valuation is to determine
the treatment of a claim by a plan, the values determined at
the § 506(a) hearing must be compatible with the values that
will prevail on the confirmation date . . . .” In re Stanley, 185
B.R. 417, 423-24 (Bankr. D. Conn. 1995). We, therefore,
agree with the Bankruptcy Court‟s determination that the
appropriate time at which to assess the Project‟s fair market
value in deciding the Committee‟s motion was on, or close to,
the plan‟s confirmation date. See, e.g., In re Melgar Enters.,
Inc., 151 B.R. 34, 39 (Bankr. E.D.N.Y. 1993) (finding that a
real estate project should be valued in its present state and “in

19
Investors stipulated, the appraisal accurately calculated the
Project‟s fair market value, the Bankruptcy Court correctly
concluded that claims of the Cornerstone Investors were
wholly unsecured.

C. Lien Stripping in Chapter 11 Reorganizations

The Cornerstone Investors argue that denying them
future lot sale proceeds that exceed the Project‟s judicially
determined value as of confirmation constitutes a form of lien
stripping disallowed by the Supreme Court‟s decision in
Dewsnup. For the reasons set forth below, however, we reject
this argument.

In Dewsnup, the Supreme Court considered “some
ambiguities” in § 506 and its relationship to other provisions
of the Bankruptcy Code when a Chapter 7 debtor‟s property
increases in value between the time of its judicial valuation
and the time of its foreclosure sale. 502 U.S. at 416. Guided
by the principle that liens are to pass through bankruptcy
unaffected, the Court rejected the notion that a mortgagee
could be forced to accept the judicially determined value,
even if the foreclosure sale produced more:

The practical effect of petitioner‟s
argument is to freeze the
creditor‟s secured interest at the
judicially determined valuation.
By this approach, the creditor
would lose the benefit of any
increase in the value of the

close proximity to the effective date of the plan”). No party
has argued otherwise.

20
 property by the time of the
foreclosure sale. The increase
would accrue to the benefit of the
debtor, a result some of the parties
describe as a “windfall.”

We think, however, that the
creditor‟s lien stays with the real
property until the foreclosure.
That is what was bargained for by
the mortgagor and the mortgagee.

Id. at 417. Expressly limiting its focus to the specific facts
presented, the Court held that “[a]ny increase over the
judicially determined valuation during bankruptcy rightly
accrues to the benefit of the creditor.” Id. at 416-17.

Dewsnup involved a Chapter 7 liquidation proceeding
and the Supreme Court did not address whether the same
result would be reached in Chapter 11 reorganization cases.
See id. “A great majority of courts that have considered the
issue . . . have concluded that the holding in Dewsnup should
be limited to Chapter 7 cases . . . .” In re Johnson, 386 B.R.
171, 175 (Bankr. W.D. Pa. 2008). That is because “[t]he
rationales advanced in the Dewsnup opinion for prohibiting
lien stripping . . . have little relevance in the context of
rehabilitative bankruptcy proceedings under Chapter[] 11.”
In re Bartee, 212 F.3d 277, 291 n.21 (5th Cir. 2000) (internal
quotation marks and citation omitted). Particularly
significant is the fact that, as hinted by the Dewsnup Court
itself, “pre-Code law did provide for the modification of liens
in reorganization cases.” Harmon v. United States, 101 F.3d
574, 582 n.4 (8th Cir. 1996). “Congress must have enacted
the Code with a full understanding of this practice.”

21
Dewsnup, 502 U.S. at 419. The distinction makes sense:
Chapter 7 liquidation proceedings involve the sale of liened
property; Chapter 11 reorganizations involve the retention
and use of that property in the rehabilitated debtor‟s business.
The Code makes that clear: “the process of lien stripping is
ingrained in the reorganization provisions of the Bankruptcy
Code to such an extent that any attempt to extend the holding
in Dewsnup to Chapter 11 cases would require that numerous
provisions of the statute be ignored or construed in a very
convoluted manner.”10 Johnson, 386 B.R. at 176; see also In
re Dever, 164 B.R. 132, 133 (Bankr. C.D. Cal. 1994).
Indeed, Congress‟s post-Dewsnup addition of 11 U.S.C. §
1123(b)(5) — permitting modification of the rights of holders
of secured claims, except those secured solely by a debtor‟s

10
Two provisions in Chapter 11 demonstrate the
complications inherent in the Cornerstone Investors‟
invocation of Dewsnup. The first is § 1129(b), pursuant to
which a Chapter 11 plan must provide for the retention of
liens only up to the value of the secured creditor‟s collateral
in order to satisfy the requirements of a cram down. See In re
680 Fifth Ave. Assocs., 156 B.R. 726, 731 n.7 (Bankr.
S.D.N.Y. 1993). That the lien a plan must preserve need only
collateralize a “secured claim,” as defined in § 506(a), is
indicative of Chapter 11 debtors‟ ability to strip liens down to
the collateral‟s value. Id. The second is § 1111(b), pursuant
to which undersecured creditors may opt out of the lien
stripping found in § 1129 and instead be treated as fully
secured to the extent of their allowed claims. That
undersecured creditors have that option similarly suggests
that Chapter 11 debtors possess the authority to limit secured
claims to the value of the collateral. See Wade v. Bradford,
39 F.3d 1126, 1129 (10th Cir. 1994).

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principal residence — seems to constitute explicit approval of
lien stripping in Chapter 11 bankruptcies. Johnson, 386 B.R.
at 176-77.

We therefore agree with the majority of courts that
Dewsnup‟s holding should not be imported into Chapter 11
cases. That this particular plan of reorganization provides for
Debtors to develop and sell all of the lots does not alter our
conclusion, because that is Debtors‟ business. As appealing
as it might be to apply the Dewsnup Court‟s holding to the
“sale” context here, it simply does not fit. Debtors‟ collateral
is not being sold in a Chapter 7 liquidation. There is neither
foreclosure nor loss of opportunity to “credit bid,” which
seem to have animated the Court‟s reasoning in Dewsnup.
Unlike Chapter 7 liquidations, Chapter 11 reorganizations call
for the creditor to receive payments equal to the value of its
interest in the collateral over time. See In re Bowen, 174 B.R.
840, 855 (Bankr. S.D. Ga. 1994) (“Unlike the creditor in
Dewsnup, creditors in reorganization cases receive something
in exchange for the voiding of their liens: payment
obligations under a plan of reorganization.”). Thus, we find
no impermissible stripping of the Cornerstone Investors‟
liens.

Accordingly, the Bankruptcy Court correctly found
that the fair market value of the Project was less than the
secured claim of the Bank Lenders, and did not violate
Dewsnup, or any other principle of bankruptcy law, by
adjudging the Cornerstone Investors‟ claims wholly
unsecured.

D. Burden of Proving the Project’s Value

23
 Having now disposed of the Cornerstone Investors‟
principal arguments for why the Project‟s fair market value as
of confirmation cannot control here, we return to the burden
of proof. To reiterate, when a party moves for a bankruptcy
court to value secured claims pursuant to § 506(a), a burden-
shifting framework will govern. Application of the
framework here demonstrates that the Cornerstone Investors‟
appeal must fail.

The Committee filed the motion seeking to have the
Cornerstone Investors‟ claims deemed wholly unsecured, and
it was therefore obligated to present evidence that the
Project‟s fair market value, together with the value of other
collateral held by Debtors, was less than the Bank Lenders‟
secured claim. Its submission of an appraisal previously
accepted as evidence of the Project‟s value at a cash collateral
hearing, as adjusted, satisfied the Committee‟s burden. The
veteran appraiser it enlisted used well-accepted techniques of
real estate appraisal to calculate the Project‟s fair market
value. That the appraiser did so in light of the property‟s
“proposed disposition or use” is clear from its acceptance of
results derived from the “Developer‟s Approach,” an income
capitalization “method of estimating land value when
subdivision and development are the highest and best use of
the parcel of land being appraised.” Dictionary of Real Estate
Appraisal (4th ed.) 279-80. That approach most “accurately
considered the time and expenses” that would be incurred by
the Debtors in developing the property. The Bankruptcy
Court, therefore, did not err by accepting the appraiser‟s
calculation of the Project‟s fair market value, namely,
$9,543,396.23 after adjustment.

On appeal, the Cornerstone Investors attempt to chip
away at the appraisal, contending that the appraiser‟s

24
methodology was flawed in certain respects. However, the
Cornerstone Investors leveled no such challenges before the
Bankruptcy Court. At the hearing on the Committee‟s
motion, they conceded that the appraisal accurately calculated
the Project‟s fair market value and urged only that the fair
market value should not control. Even assuming, however,
that their failure to challenge the accuracy of the appraisal‟s
fair market value determination did not waive the contention
on appeal, the Cornerstone Investors‟ arguments still fail to
demonstrate any error by the Bankruptcy Court.

The purported missteps by the appraiser to which they
point do not undermine the appraisal‟s suitability to satisfy
the Committee‟s initial burden. First, the Cornerstone
Investors suggest that the appraiser improperly applied
discounts “to attract a buyer” because the plan did not
contemplate sale to a single developer. Those discounts,
however, merely accounted for the risks and uncertainty
inherent in the build-out in which Debtors were engaged. In
other words, they were necessary to establish the Project‟s
present fair market value. Second, the Cornerstone Investors
urge that the appraisal was too stale to be acceptable, having
been completed over a year before the plan‟s confirmation.
However, through stipulations of fact presented to the
Bankruptcy Court, the fair market value of the Project was
reduced to account for sales of homes that occurred between
the date of appraisal and the date of confirmation. Although
the adjustment did not account for potential shifts in land
value or the residential home market that may have occurred
during that period, the Cornerstone Investors offered no
evidence of any such changes. The Bankruptcy Court,
therefore, did not err by adopting the adjusted appraisal value

25
of $9,543,396.23 as a fair reflection of the Project‟s worth as
of the date on which the plan was confirmed.

Under a burden-shifting framework, the Cornerstone
Investors had the ultimate burden of persuading the
Bankruptcy Court that the appraisal undervalued the Project
and that the Project was instead worth enough to secure their
claims under § 506(a). At the hearing on the Committee‟s
motion, the Cornerstone Investors, however, expressly
declined to have “an appraiser . . . come in and say that either
[the Committee‟s] appraisal was wrong or that we had a
higher . . . fair market value.” Instead, they relied upon the
plan budget as providing the proper valuation. The
Bankruptcy Court and District Court properly held that the
budget was not a valuation, but, rather, a projection and
refused the Cornerstone Investors‟ invitation to use a wait-
and-see approach. The Cornerstone Investors thus failed to
satisfy their burden.

Thus, the Bankruptcy Court properly accepted the
valuation put forth by the Committee because it satisfied the
Committee‟s burden of overcoming the presumed validity and
amount of the Cornerstone Investors‟ secured claims. The
Cornerstone Investors, by contrast, did not satisfy their
burden of proving that their secured claims were worth more
than the Committee‟s valuation indicated. Accordingly, the
Bankruptcy Court did not clearly err by concluding that, in
total, the collateral securing the secured debt was worth
$11,165,477.15 and that therefore the Cornerstone Investors‟
claims were unsecured.

26
IV. Conclusion

For the foregoing reasons, we will affirm the
Bankruptcy Court‟s determination that the secured claims of
the Cornerstone Investors should be valued at zero. Pursuant
to Debtors‟ plan of reorganization, then, they are to be treated
as members of Class 5, unsecured claimants.

27