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In re Sunnyslope Housing Limited Partnership

United States Court of Appeals, Ninth Circuit

June 23, 2017

In re Sunnyslope Housing Limited Partnership, Debtor.
v.
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,
v.
First Southern National Bank, Defendant-Appellee. In re Sunnyslope Housing Limited Partnership, Debtor. First Southern National Bank, Plaintiff-Appellant,
v.
Sunnyslope Housing LP, Defendant-Appellee. In re Sunnyslope Housing Limited Partnership, Debtor. Sunnyslope Housing LP, Plaintiff-Appellant,
v.
First Southern National Bank, Defendant-Appellee.

          Argued and Submitted En Banc January 17, 2017 San Francisco, California

         Appeals 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

          Edward K. Poor (argued), Quarles & Brady LLP, Chicago, Illinois; Brian Sirower and Walter J. Ashbrook, Quarles & Brady LLP, Phoenix, Arizona; for Plaintiff-Appellant Plaintiff-Appellant.

          Susan 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.

          Donald 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.

         ORDER AND AMENDED OPINION

         SUMMARY[*]

         Bankruptcy

         The en 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 district court.

         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 cram-down valuations.

         Here, 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.

         The en 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.

         The en banc court held that the bankruptcy court did not abuse its discretion in finding the plan of reorganization feasible.

         Finally, 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).

         Dissenting, 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 restrictive covenants.

         ORDER

         The opinion filed May 26, 2017, is amended as follows:

         1. At page 9 of the slip opinion, delete "11 U.S.C. § 1325(a)(5)(B)" and replace it with "11 U.S.C. § 1129(b)(2)(A)."

         2. At 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."

         3. At 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 modified."

          OPINION

          HURWITZ, Circuit Judge:

         When a 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 property." Id.

         In 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)).

         In 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.

         BACKGROUND

         I. The Sunnyslope Project

         Sunnyslope 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.

         A. ...


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