In re Sunnyslope Housing Limited Partnership, Debtor.
Sunnyslope Housing Limited Partnership, Defendant-Appellee. First Southern National Bank, Plaintiff-Appellant, In re Sunnyslope Housing Limited Partnership, Debtor. Sunnyslope Housing Limited Partnership, Plaintiff-Appellant,
First Southern National Bank, Defendant-Appellee. In re Sunnyslope Housing Limited Partnership, Debtor. First Southern National Bank, Plaintiff-Appellant,
Sunnyslope Housing LP, Defendant-Appellee. In re Sunnyslope Housing Limited Partnership, Debtor. Sunnyslope Housing LP, Plaintiff-Appellant,
First Southern National Bank, Defendant-Appellee.
and Submitted En Banc January 17, 2017 San Francisco,
from the United States District Court for the District of
Arizona, D.C. Nos. 2:11-cv-02579-HRH, 2:12-cv-02700-HRH, H.
Russel Holland, District Judge, Presiding
K. Poor (argued), Quarles & Brady LLP, Chicago, Illinois;
Brian Sirower and Walter J. Ashbrook, Quarles & Brady
LLP, Phoenix, Arizona; for Plaintiff-Appellant
M. Freeman (argued), Henk Taylor, and Justin Henderson, Lewis
and Roca LLP, Phoenix, Arizona; Bradley D. Pack, Scott B.
Cohen, and David Wm. Engelman, Engelman Berger P.C., Phoenix,
Arizona; for Defendant-Appellee Defendant-Appellee.
L. Gaffney and Jasmin Yang, Snell & Wilmer LLP, Phoenix,
Arizona, for Amici Curiae Arizona Bankers Association,
California Bankers Association, Hawaii Bankers Association,
Idaho Banks Association, Montana Bankers Association, and
Washington Bankers Association.
Before: Sidney R. Thomas, Chief Judge, and Alex Kozinski,
Diarmuid F. O'Scannlain, Susan P. Graber, Ronald M.
Gould, Richard C. Tallman, Carlos T. Bea, Jacqueline H.
Nguyen, Andrew D. Hurwitz, John B. Owens, and Michelle T.
Friedland, Circuit Judges.
AND AMENDED OPINION
banc court affirmed the district court's judgment, which
affirmed the bankruptcy court's affirmance of a Chapter
11 plan of reorganization, as modified on remand from the
debtor sought, over a secured creditor's objection, to
retain and use the creditor's collateral in the Chapter
11 plan through a "cram down." Pursuant to 11
U.S.C. § 506(a)(1), the creditor's claim was treated
as secured "to the extent of the value of such
creditor's interest." That value was
"determined in light of the purpose of the valuation and
of the proposed disposition or use of such property."
Under Associates Commercial Corp. v. Rash, 520 U.S.
953 (1997), a "replacement-value standard, " rather
than a "foreclosure-value standard, " applies to
unlike in a typical case, foreclosure value exceeded
replacement value because foreclosure would vitiate covenants
requiring that the secured property, an apartment complex, be
used for low-income housing. The en banc court nonetheless
held that, under Rash, § 506(a)(1) required the
use of replacement value rather than a hypothetical value
derived from the very foreclosure that the reorganization was
designed to avoid. Thus, the bankruptcy court did not err in
approving the debtor's plan of reorganization and valuing
the collateral assuming its continued use after
reorganization as low-income housing.
banc court held that the plan of reorganization was fair and
equitable, as required by 11 U.S.C. § 1129(b), because
the creditor retained its lien and received the present value
of its allowed claim over the term of the plan. The secured
claim was not undervalued, and the plan provided for payments
equal to the present value of the secured claim.
banc court held that the bankruptcy court did not abuse its
discretion in finding the plan of reorganization feasible.
the en banc court held that the bankruptcy court did not err
in failing to allow the creditor, on remand, to make a second
election to have its claim treated as either fully or
partially secured under 11 U.S.C. § 1111(b).
Judge Kozinski, joined by Judges O'Scannlain and
Friedland, wrote that the majority misinterpreted
Rash, and the appropriate value of the secured
property was the market price of the building without
opinion filed May 26, 2017, is amended as follows:
page 9 of the slip opinion, delete "11 U.S.C. §
1325(a)(5)(B)" and replace it with "11 U.S.C.
page 11 of the slip opinion, delete "Cornerstone at
Camelback LLC invested $1.2 million in the complex." and
in the next sentence, the word "then." The amended
opinion should state: "After confirmation, First
Southern obtained a stay of the plan of reorganization from
the district court pending appeal."
page 11 of the slip opinion, delete the sentence following
"First Southern again appealed." and replace it
with "The district court denied First Southern's
request for a stay. Cornerstone at Camelback LLC invested
$1.2 million in the complex, and the plan was funded. The
district court affirmed the reorganization plan as
HURWITZ, Circuit Judge:
debtor, over a secured creditor's objection, seeks to
retain and use the creditor's collateral in a Chapter 11
plan of reorganization through a "cram down, " the
Bankruptcy Code treats the creditor's claim as secured
"to the extent of the value of such creditor's
interest." 11 U.S.C § 506(a)(1). That value is to
"be determined in light of the purpose of the valuation
and of the proposed disposition or use of such
Associates Commercial Corp. v. Rash, the Supreme
Court adopted a "replacement-value standard" for
§ 506(a)(1) cram-down valuations. 520 U.S. 953, 956
(1997). The Court held that replacement value, "rather
than a foreclosure sale that will not take place, is the
proper guide under a prescription hinged to the
property's 'disposition or use.'"
Id. at 963 (quoting In re Winthrop Old Farm
Nurseries, Inc., 50 F.3d 72, 75 (1st Cir. 1995)).
rejecting a "foreclosure-value standard, " the
Court also noted that foreclosure value was "typically
lower" than replacement value. Id. at 960.
Today, however, we confront the atypical case. Because
foreclosure would vitiate covenants requiring that the
secured property-an apartment complex-be used for low-income
housing, foreclosure value in this case exceeds replacement
value, which is tied to the debtor's "actual
use" of the property in the proposed reorganization.
Id. at 963. But we take the Supreme Court at its
word and hold, as Rash teaches, that §
506(a)(1) requires the use of replacement value rather than a
hypothetical value derived from the very foreclosure that the
reorganization is designed to avoid. Thus, the bankruptcy
court did not err in this case in approving Sunnyslope's
plan of reorganization and valuing the collateral assuming
its continued use after reorganization as low-income housing.
The Sunnyslope Project
Housing Limited Partnership ("Sunnyslope") owns an
apartment complex in Phoenix, Arizona. Construction funding
came from three loans. Capstone Realty Advisors, LLC,
provided the bulk of the funding through an $8.5 million loan
with an interest rate of 5.35%, secured by a first-priority
deed of trust. The Capstone loan was guaranteed by the United
States Department of Housing and Urban Development
("HUD"), and funded through bonds issued by the
Phoenix Industrial Development Authority. The City of Phoenix
and the State of Arizona provided the balance of the funding.
The City loan was secured by a second-position deed of trust,
and the State loan by a third-position deed of trust.