Chаpter 11 debtor Winthrop Old Farm Nurseries, Inc. (“Winthrop”), appeals the district court order affirming the bankruptcy court’s decision that, to determine the status of the claim of undersecured junior mortgagee New Bedford Institution for Savings (“NBIS”) pursuant to 11 U.S.C. § 506(a), Winthrop’s real property (the “Property”) should be valued аt its fair market value. We affirm.
*73 I.
BACKGROUND
Winthrop operates a retail garden shop and commercial landscaping business on the Property, located at 462 Winthrop Street in Rehoboth, Massachusetts. On February 2, 1993, Winthrop filed a petition for relief under Chapter 11 of the Bankruptcy Code (the “Code”). On July 16,1993, Winthroр 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 effеctively retains control of the Property and its use.
The Property is encumbered by a first mortgage in the amount of $287,000 held by Northeast Savings, F.A., and by tax liens of approximately $20,000. NBIS, the holder of a junior mortgage on the Property, is owed approximately $576,000. The parties stipulated to a liquidation value for the Property of $300,000 and a fair market value of $400,-000. Winthrop’s Plan would transfer the Property to the new entity free and clear of all liens except for the Northeast Savings mortgage. The Plan would “strip down” the NBIS mortgage to the liquidation value of the Property, leaving NBIS’s claim entirely unsecured. The Plan рroposes 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 аt 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 Chaptеr 11 debtor proposes to retain and use, granted NBIS’s motion and valued the Property at $400,000. The district court affirmed, and Winthrop now appeals.
II.
STANDARD OF REVIEW
“In an appeal from district court review of a bankruptcy court order, we independently review the bankruptcy court’s decision, applying the ‘сlearly erroneous’ standard to findings of fact and de novo review to conclusions of law.”
Grella v. Salem Five Cent Sav. Bank,
III.
DISCUSSION
Section 506(a) governs the determination of whether any portion of a creditor’s claim should be classified as a secured claim:
(a) An allowed claim of a сreditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor’s interest or the amount so subject to setoff is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition оr 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 *74 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 un-dersecured 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 рrovides for adequate protection payments to secured creditors in some circumstances — is further evidence that Congress intended that courts would sometimes value collateral at something greater than its liquidation price:
Neither is it expected that the courts will construe the tеrm 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 usеd to determine whether such payments are justified should be extremely conservative.
See In re Case,
We have not previously considered this issue. A number of courts, however, including four Circuit Courts, have adhered to this clear expression of congressional intent and declined to value collateral that a debtor proposes to retain based on a hypothetical foreclosure sale. These courts reason that because the reorganizing debtor proposes to retain and use the collateral, it should not be valued as if it were being liquidated; rather, courts should value the collateral “in light of’ the debtor’s proposal to retain it and ascribe to it its going-concern or fair market value with no deduction for hypothetical costs of sale. 2
Other courts, however, have chosen to read § 506(a) as requiring in virtually all cases a valuation of collateral limited to the net amount a secured creditor could recover if it
*75
seized or foreclosed on the collateral and disposed of it in accordance with applicable state law.
3
These courts tie 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.,
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 *76 valuation method that is fairest given the prevailing circumstances.
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 bankruptсy petition.
Cf. Butner v. United States,
We find that the bankruptcy court correctly interpreted § 506(a) as according it flexibility in choosing among pоssible standards of valuation, and properly applied the statute to the particular facts of this case. Winthrop 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 сourt committed no error in valuing the Property at its stipulated fair market value.
IV.
CONCLUSION
For the foregoing reasons, the order of the district court is
Affirmed.
Notes
.
See United Sav. Ass'n of Tex. v. Timbers of Inwood Forest Assoc.,
.
See, e.g., In re McClurkin,
.
See, e.g., In re Demakes Enters., Inc.,