
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                                         -2-                                          2            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                                  __________________                                         -3-                                          3                      "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                                         ______________________                                         -4-                                          4                      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                                         -5-                                          5            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)).                                         -6-                                          6            (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                      ________     ___________________                                         -7-                                          7                      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                                         -8-                                          8            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.")                                         -9-                                          9            (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.                                         -10-                                          10                      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                                         -11-                                          11            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.                                         -12-                                          12                                         IV.                                         IV.                                         ___                                      CONCLUSION                                      CONCLUSION                                      __________                      For  the  foregoing  reasons,  the  order  of   the            district court is                      Affirmed.                      Affirmed                      ________                                         -13-                                          13
