Winthrop Old Farm Nurseries, Inc. v. New Bedford Institution for Savings

Winthrop Old Farm Nurseries, Inc. (Winthrop) (debtor) operated a garden store and landscaping business. The property that Winthrop’s business was located on was encumbered by two mortgages. The first mortgage, held by Northeast Savings, F.A., totaled $307,000. The second mortgage, owned by New Bedford Institution for Savings (New Bedford) (creditor), totaled $576,000. The property had a liquidation value of $300,000 and a fair market value of $400,000. In 1993 Winthrop filed for Chapter 11 bankruptcy. Under the proposed reorganization plan, Winthrop would continue to use the property. The property would be transferred to a third party free from all encumbrances except for the Northeast Savings mortgage. The property would be valued according to its liquidation value of $300,000. New Bedford would become an unsecured creditor and receive $0.20 for every dollar it was owed. New Bedford objected to the proposed reorganization plan, arguing that the property should be valued according to its fair market value of $400,000. If the property were valued at its fair market value, New Bedford would have a secured claim of approximately $100,000, with its remaining $476,000 constituting an unsecured claim. Relying on the relevant section of the United States Bankruptcy Code, 11 U.S.C. § 506, the bankruptcy court held that the correct valuation method to utilize depended on the property’s future use. Because Winthrop would retain the use of the property, the bankruptcy court held that the fair market value of the property should be used in the reorganization plan. Winthrop appealed.