859 F.3d 637
9th Cir.2017Background
- Sunnyslope Housing LP owns a Phoenix apartment complex financed primarily by an $8.5M Capstone loan (first lien), with subordinate City and State loans; multiple regulatory and restrictive covenants require low-income use and run with the land but terminate on foreclosure.
- Sunnyslope defaulted; HUD (guarantor) sold the loan to First Southern, which initiated foreclosure and a receiver contracted to sell the property, but Sunnyslope filed Chapter 11 before the sale closed.
- Sunnyslope proposed a cram-down Chapter 11 plan that would retain and operate the property as low-income housing; central dispute was valuation of First Southern’s collateral under 11 U.S.C. § 506(a)(1).
- Experts produced divergent valuations depending on whether low-income restrictions were assumed: valuations ranged roughly $2.6M–$3.9M (with restrictions) and $7M–$7.74M (without restrictions/assuming foreclosure removes restrictions).
- Bankruptcy court valued the collateral using replacement value tied to Sunnyslope’s proposed continued use as low-income housing, confirmed the plan (4.4% interest over 40 years with a balloon), and later added tax credits; First Southern appealed; Ninth Circuit affirms.
Issues
| Issue | Plaintiff's Argument (First Southern) | Defendant's Argument (Sunnyslope) | Held |
|---|---|---|---|
| Valuation under § 506(a)(1) for cram-down | Valuate collateral at its highest/"highest and best use" (market/foreclosure value) disregarding low-income covenants that would be removed on foreclosure | Value based on replacement value tied to the debtor’s proposed use (continued low-income housing) per Rash and § 506(a)(1) | Court applied Rash: replacement value measured by debtor’s actual proposed use; affirmed valuation assuming low-income restrictions remain in place |
| Plan fairness / interest rate (Till test) | 4.4% plan rate is too low compared to original loan rate; thus creditor won’t receive present value | 4.4% derived via Till formula (prime adjusted for risk); bankruptcy court found it yields present value | Court found no clear error: 4.4% satisfied Till and provided present value of secured claim |
| Plan feasibility (§ 1129(a)(11)) | Plan may be infeasible; payments and balloon may default | Projections and expert testimony showed reasonable probability of success; collateral useful for 40 years and balloon is backed by property value | Bankruptcy court did not abuse discretion; plan feasible |
| § 1111(b) election timing / ability to change election after valuation altered by remand | Should be allowed to change election after valuation increased (tax credits added) because change affects secured claim treatment | Election was timely; post-remand valuation change was not materially altering treatment; allowing a second election would unfairly enable re-litigating plan | Court held bankruptcy court did not abuse discretion denying a second election; amendment not required because treatment under plan remained substantively the same |
Key Cases Cited
- Associates Commercial Corp. v. Rash, 520 U.S. 953 (1997) (adopts replacement-value standard for § 506(a)(1) cram-down valuations tied to debtor’s proposed use)
- In re Taffi, 96 F.3d 1190 (9th Cir. 1996) (valuation for cram-down should reflect debtor’s continued use, not hypothetical foreclosure)
- Till v. SCS Credit Corp., 541 U.S. 465 (2004) (plurality endorses formula approach for cram-down interest rate using prime rate adjusted for risk)
- In re Sunnyslope Hous. Ltd. P’ship, 818 F.3d 937 (9th Cir. 2016) (panel decision addressing valuation; later vacated for en banc rehearing but cited in proceedings)
- In re Bonner Mall P’ship, 2 F.3d 899 (9th Cir. 1993) (successful reorganization and estate-value maximization are primary Chapter 11 goals)
- In re JTS Corp., 617 F.3d 1102 (9th Cir. 2010) (valuation findings by bankruptcy court are factual and reviewed for clear error)
- In re Acequia, Inc., 787 F.2d 1352 (9th Cir. 1986) (standard of review and factors for feasibility and "fair and equitable" cram-down analysis)