818 F.3d 937
9th Cir.2016Background
- Sunnyslope developed a 150‑unit affordable housing complex financed by a senior HUD‑guaranteed loan (Capstone), subordinate public loans (City, State, IDA), and LIHTC tax‑credit agreements; many subordinate documents stated covenants would terminate on foreclosure.
- Capstone defaulted; HUD acquired the loan, released the HUD Regulatory Agreement, and sold the loan to First Southern, which purchased at a discount and commenced foreclosure pre‑bankruptcy.
- Sunnyslope filed Chapter 11, elected a cram‑down under 11 U.S.C. § 1129(b), and sought to retain the property; valuation of First Southern’s secured claim under § 506(a) became the core dispute.
- Sunnyslope’s valuation treated the property as burdened by affordable‑housing covenants (low rental income), producing a low secured value; First Southern’s valuation assumed those covenants would be extinguished by foreclosure and yielded a much higher value.
- Bankruptcy court (and district court on initial review) accepted valuation limited by covenants (later adjusted to include some tax‑credit value); Ninth Circuit majority reversed, holding § 506(a) valuation should not be reduced to reflect junior subordinated use restrictions in this case.
Issues
| Issue | Sunnyslope’s Argument | First Southern’s Argument | Held |
|---|---|---|---|
| Proper measure of secured claim under 11 U.S.C. § 506(a) for cram‑down when debtor retains property | Value should reflect debtor’s proposed use (affordable housing) and attendant covenants limiting income, so secured claim is lower | Value should reflect senior lienholder’s effective entitlement — i.e., value absent junior subordinated restrictions (what creditor could realize on foreclosure or replacement value) | Court held valuation should not be reduced by subordinated affordable‑housing restrictions; reversal of lower courts’ valuation |
| Applicability of Rash replacement‑value principle to property subject to recorded use covenants | Rash requires valuing collateral based on debtor’s proposed use; therefore replacement/fair‑market value must account for covenants | Rash does not permit using debtor‑use to defeat senior lien priority; replacement value must reflect what a willing buyer would pay for like property (taking priority and ability to clear junior burdens into account) | Court concluded Rash does not authorize valuing collateral by the debtor’s restricted income stream here; senior position and ability to eliminate junior covenants in foreclosure control valuation |
| Equitable mootness (should appeal be dismissed because plan consummated) | Consummation and new equity investor would be unfairly harmed by unwinding plan | First Southern sought stays and timely appeals; relief is available and investors were not innocent third parties | Court denied Sunnyslope’s motion: appeal not equitably moot |
| Treatment of LIHTC tax credits in § 506(a) valuation | Tax credits affect value and should be included in secured claim valuation | Bank argued valuation should be based on lien priority and replacement value; treatment of tax credits secondary | Ninth Circuit did not decide all tax‑credit issues here (remanded); lower court had later included some tax‑credit value but primary reversal was on covenant issue |
Key Cases Cited
- Associates Commercial Corp. v. Rash, 520 U.S. 953 (1997) (replacement‑value standard governs cram‑down valuation where debtor retains collateral)
- In re Taffi, 96 F.3d 1190 (9th Cir. 1996) (fair‑market value measured by debtor’s proposed use; valuation within actual situation presented)
- In re Mortgages Ltd., 771 F.3d 1211 (9th Cir. 2014) (equitable‑mootness framework for bankruptcy appeals)
- In re Thorpe Insulation Co., 677 F.3d 869 (9th Cir. 2012) (equitable‑mootness factors and analysis)
- In re Focus Media, 378 F.3d 916 (9th Cir. 2004) (burden on party asserting equitable mootness; stay procedure considerations)