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 H. Russel Holland, District Judge, Presiding D.C.
Nos. 2:11-cv-02579-HRH, 2:12-cv-02700-HRH
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.
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
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.
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.
secure financing and tax benefits, Sunnyslope entered into
1. To obtain the HUD guarantee, Sunnyslope signed a
Regulatory Agreement requiring that the apartment complex be
used for affordable housing.
2. Sunnyslope also entered into a Regulatory Agreement with
the Phoenix Industrial Development Authority, requiring
Sunnyslope to "preserve the tax-exempt status" of
the project, and use 40% of the units for low-income housing.
The agreement provided that its covenants "shall run
with the land and shall bind the Owner, and its successors
and assigns and all subsequent owners or operators of the
Project or any interest therein." The restrictions,
however, terminated on "foreclosure of the lien of the
Mortgage or delivery of a deed in lieu of foreclosure."
3. The City of Phoenix required Sunnyslope to sign a
Declaration of Affirmative Land Use Restrictive Covenants,
mandating that 23 units be set aside for low-income families.
The restriction ran with the land and bound "all future
owners and operators" but, similarly, would be vitiated
4. The Arizona Department of Housing required Sunnyslope to
enter into a Declaration of Covenants, Conditions, and
Restrictions. That 40-year agreement set aside five units for
low-income residents. The agreement ran with the land and
bound future owners, terminated upon ...