## Facts

- Winthrop Old Farm Nurseries, Inc. filed Chapter 11 while operating a garden shop and landscaping business on real property in Rehoboth, Massachusetts.
- The property was encumbered by a first mortgage (approximately $287,000–$307,000), tax liens (about $20,000), and a junior mortgage held by New Bedford Institution for Savings (NBIS) (about $576,000).
- The parties stipulated the property’s liquidation value was $300,000 and its fair market value was $400,000.
- Winthrop’s plan proposed transferring the property to a new entity controlled by its principal and leasing it back, so Winthrop would continue to control and use the property in its business.
- The plan proposed transferring the property free and clear of liens except the first mortgage, valuing the collateral at liquidation value, and treating NBIS as wholly unsecured after senior liens.
- NBIS objected, arguing § 506(a) required valuation at fair market value because the plan contemplated continued use, leaving NBIS with a partially secured claim.

## Issues

1. Under 11 U.S.C. § 506(a), whether collateral should be valued at liquidation value or fair market value when a Chapter 11 plan provides for the debtor to retain effective control and continue using the collateral rather than liquidating it.
2. Whether valuing the property at fair market value properly determines the secured portion of an undersecured junior mortgagee’s claim in these circumstances.

## Decision

- The First Circuit affirmed the district court’s judgment, which affirmed the bankruptcy court.
- The court held § 506(a) permits valuation at fair market value when the plan provides for retention and continued use of the collateral in the debtor’s business.
- Because Winthrop’s plan effectively preserved the property’s ongoing productive use through a transfer-and-leaseback arrangement, fair market value was the appropriate measure for determining NBIS’s secured claim.

## Legal Principles

- Section 506(a) requires valuation “in light of the purpose of the valuation and of the proposed disposition or use” of the collateral, allowing context-dependent valuation methods.
- When a debtor’s reorganization plan contemplates continued use of collateral, fair market (going-concern) value may be used rather than liquidation (forced-sale) value.
- Liquidation value is generally associated with scenarios where foreclosure or sale is contemplated; it is not the default where the debtor retains the economic benefits of continued use.
- A valuation method should reflect the plan’s economic reality and avoid granting the debtor an unwarranted benefit by reducing secured claims using a forced-sale measure while continuing to exploit higher ongoing value.

## Conclusion

The First Circuit upheld valuation of the debtor’s real property at fair market value under § 506(a) because the Chapter 11 plan effectively preserved the debtor’s continued control and business use of the property, making liquidation value an improper measure for determining the secured portion of the junior mortgagee’s claim.


Winthrop Old Farm Nurseries, Inc. v. New Bedford Inst. for Sav., 50 F.3d 72 (1st Cir. 1995)