F OR P UBLICATION



### UNIT E D ST AT E S CO URT O F APPE AL S FO R T H E NINT H CIRCUIT

I n the Matter of: S U

N N Y S L O P E H O U S I N G L I M I T E D P A R

T N E R S H I P , Debtor

,

F I R S T S O U T H E R

N N A T I O N

A L B A N K , Plaintiff-Appellant

,

v

.

S U N N Y S L O P E H O U S I

N G L I M I T E D P A R T N E R S H I P , Defendant-Appellee. N o. 12-17241

D.C. No. 2:11-cv-02579- HRH

I n the Matter of: S U

N N Y S L O P E H O U S I N G L I M I T E D P A R

T N E R S H I P , Debtor

,

S U N N Y S L O P E H O U S I

N G L I M I T E D P A R T N E R S H I P , Plaintiff-Appellant

,

v

.

F I R S T S O U T H E R

N N A T I O N

A L B A N K , Defendant-Appellee. N o. 12-17327

D.C. No. 2:11-cv-02579- HRHI

N T H E M A T T E R O F S U N N Y S L O P E H O U S I

N G 2

I n the Matter of: S U

N N Y S L O P E H O U S I N G L I M I T E D P A R

T N E R S H I P , Debtor

,

F I R S T S O U T H E R

N N A T I O N

A L B A N K , Plaintiff-Appellant

,

v

.

S U N N Y S L O P E H O U S I

N G L P, Defendant-Appellee. N o. 13-16164

D.C. No. 2:12-cv-02700- HRH

I n the Matter of: S U

N N Y S L O P E H O U S I N G L I M I T E D P A R

T N E R S H I P , Debtor

,

S U N N Y S L O P E H O U S I

N G L P, Plaintiff-Appellant

,

v

.

F I R S T S O U T H E R

N N A T I O N

A L B A N K , Defendant-Appellee. N o. 13-16180

D.C. No. 2:12-cv-02700- HRH

OPI NI ON

A ppeal from the United States District Court for the District of Ariz o na H. Russel Holland, Senior District J udg e, PresidingI

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Arg ued and Submitted May 12, 2015—San F rancisco, California

F iled April 8, 2016

B efore: Alex Koz inski, Richard A. Paez

, a nd Richard R. Clifton, Circuit J udg es.

Opinion by J udg e Clifton; D issent by

J u d g e Paez

SUMMARY *

Bankruptcy

Reversing the district court’s judg ment affirming the ba n kruptcy court’s c o n firmation of a chapter 11 plan o f

r e o r ga niz ation, the panel held that the plan was based o n a n improper v aluation of a creditor’s secured interest in real property

.

The d ebtor developed a

nd operated an apartment c omplex intended to prov i d e affordable housing

. W hen the debtor defaulted on the senior loa n f o r the project, the Department of Housing and Urban Development honored i t s guarantee, acquired the senior loan f

rom the orig inal private lender, a nd resold it to F irst Southern National B ank. Fi r st Southern started the foreclosure process, w hich would have wiped out affordable housing restrictive covenants related to additional

* T h is su m m ary co n stitu

tes n o part o f th e o p in io n o f th e co u rt. It h as b een p rep ared b y

co u rt staf

f f o r th e co n v en i en ce o f

th e read er.I

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financing

. The d ebtor then w as put i n t o b ankruptcy

, and it

ex e r cised the cram down option of 11 U.S.C. § 1325(a)(5)(B ) and elected to retain the property in ex chang e f or a new pay ment plan that would requ i re it to pay F irst Southern an amount equal to the present v alue of the secured claim at the time of bankruptcy

.

The panel held that the parties’ appeals were not e quitably
moot even thoug h funding f or the reorg aniz ation plan h ad b e en provided by the investment o f new equit y b y Cornerstone at Camelb ac k

, L L C, which had taken over ownership of the debtor, and the plan h ad been substantially consummated.

The panel held that the value of F irst Southern’s secured interest under 11 U.S.C. § 506(a) should n o t b e r educed b y the impact of the affordable housing restrictions because F irst Southern was released from HUD’s require m e n ts, and its claim was superior to the rig hts of other secur e d c r editors. All of the restrictive c o venants that t he debtor soug ht to invoke were derived f

rom positions that were junior and

ex p ressly subordinated to F irst Southern’s i nterest. Disting uishing Assocs. Commercial Corp. v. Rash

, 520 U.S. 953 ( 1997), the panel held that th e p lan of reorg aniz ation confirmed by the bankruptcy court must be set aside because

v a l uing F irst Southern’s secured interest as if the affordable housing r estrictions related to subordinated positions still
ap p l i ed was not appropriate under § 506(a). The panel reversed the district court’s judg ment and remanded the case for additional proceeding s.

Dissenting

, J udg e Paez wrote that under Rash

, F irst Southern’s collateral, the apartment c o mplex

, must be valued in lig ht of the debtor’s pro p o s e d use of the property a sI

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a f f o r dable housing

. According ly

, J udg e Paez did not ag re e with the majority that the bankruptcy court e r r ed in its valuation of F irst Southern’s collateral under § 506(a).

COUNSEL

B rian Sirower (arg

ued) and W alter J

. Ashbrook, Quarles & B rady L L P, P h o enix

, Ariz ona; E. King Poor, Quarles & B rady L L P, Chicag o, I llinois, for Plain t iff-Appellant/CrossAppellee F irst Southern National B a nk.

David W illia m En g elman, Scott B

. Cohen, and B radley D

. Pack, E ng elman B e rg er, P

. C

. , Phoenix

, Ariz ona; Susan M. F reeman (arg

u ed), Henk Tay lor, a

nd J ustin Henderson, L ewis Roca Rothg erber Christie L L P, Phoenix

, Ariz o na for Debtor Defendant-Appellee/Cross-Appellant Sunny slo pe Housing L imited Partnership.I

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OP INION

CL I F TON, Circuit J udg e :

This case concerns the valuation of the secured interest in real p roperty under secti o n 506(a) of the B ankruptcy Code when a bankrupt debtor has ex ercise d t h e “ cram down” option provided under section 1325(a)(5)(B ) of the Code.

De btor Sunny slope Housing L imited Partnership (“Sunny slope”) de v eloped and operated a n apartment complex in Phoenix intended to provide affordable housing

. The project was larg e l y f inanced by g overnment ag encies, and r estrict i ons were imposed to require that the apartments would be used for affordable housi n g

. The senior loan was provided by a private enti t y b ut was g uaranteed b y the Department of Housing and Urban Developme n t (“HUD”). Other loans were provided by the Cit y o f P h o enix and the State of Ariz ona, and additional financial supp o rt was available throug h federal tax credits. Restrictions imposed in connection with the additional loans and tax credits provided that the additional financing and the related restrictions were subordinate to the HUD g uaranteed loan. Sunny sl o pe defaulted. HUD honored its g uarantee, acqui red the senior loan from th e o r i g inal p r ivate lender, a nd resold it to F irst Southern National B ank (“F irst Southern”). F i r st Southern started the f

oreclosure process, which would have the effect of wiping out all the affordable housing r estrictions related to t h e a d d i t i o n a l f

i n a n c i n g

. B e f

o r e f o r e c l o s u r e w a s accomplished, however, Sunny s l o p e was put into bankruptcy

.

As the debtor, Sunny slope e x e r cised the cram down option and elected to retain the property

. I t arg u ed that the value of F irst Southern’s secured interest should be calculatedI

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with the affordab l e housing restrictions remaining in place. The bankruptcy c ourt a

nd the district court both ag reed, a nd

a plan o f r eorg an i z ation was confirmed and implemented. The plan v alued F irst S o uthern’s secured interest at $3.9 million, substantially less than what it would cost to replace the property or the amoun t that F irst Southern could have obtained if it had been permitted to foreclose on the property

.

F irst Southern appeals. The primary question is w h e ther the value of Fi rst Southern’s secured interest should be reduced b y the impact of the affordable housing restrictions. W e conclude that it should not be reduced in that manner. W e

reverse the judg ment of the dist r i c t court and remand for further proceeding s.

I. Background

Sunny slope is an Ariz ona limited partnership. The project it developed and operated consisted of 150 apar tments. F inancing came from several sources.

The primary financing was p rovided by an $8.5 million loan fr o m C apstone A dvisors, L L C (the “Capstone L oan”). The federal g overnment, throug h HUD, gu ar anteed the Capstone L oan. The terms o f t h e l oan provided for
repay ment over 40 y ears with an i n t e r est rate of 5.35% per

annum. The loan was secured by a first-position deed of trust

on the property

. To obtain the HUD g ua r a n t e ed loan, Sunny slope h ad to en t e r into and record a Reg ulatory Ag reement that required that the project b e o p e r ated a s affordable housing and that limited rents that tenants could be charg ed to amounts within levels set by HUD.I

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The Capstone L oan w as funded by the sale of municipal bonds issued by the Phoenix I ndustrial Development Authority (“I DA”). The Phoenix I D A required the recording of an o t her ag reement that compelled the owner of the apartment project to operate it in accordance w ith the affordable housing requirements of 2 6 U.S.C. § 142(d). The I DA Reg ulatory Ag r eement provided t h a t the covenants

“ shall run with the land and shall bind the Owner, a n d i t s

su c c essors and assig ns and all subsequent owners or operators of the Project.” I t further prov i d e d that “[ t] his Ag r eement, and each a

nd a ll of the terms hereof, shall terminate and be o f

no further f

orce and effect in the event of a foreclosure of the l i e n o f t he Mortg ag e or delivery of a deed in lieu of foreclosure[

. ] ”

Additional funding for the project came from a $ 3 million loan from the City

of Phoenix

, secured b y

a second-position deed of trust. To obtain that loan, Sunny slop e had to enter into recorded covenants that required the debtor to se t aside twenty -three units of the project as affor d able housing

. The

covenan t s provided that they were b inding on successor

owners but also that “the provisions here o f are ex pressly subordinate to the HUD insured mortg ag e or D eed o f Trust,
to the HUD R eg ulatory Ag reement, and subordinate to all applicable H UD mo r t g ag e insurance

. . . reg ulations a nd related a dministrativ e r equirements.” They further provided that “[ i] n the event of foreclosure or transfer of title by deed in l i e u of foreclosure, any and all land use covenants contained herein shall automatically terminate.”

Another $500,000 in public funding came from the State of Ariz ona, secured b y a third-position deed of trust. I t was

c o n ditioned on the r ecording of covenants that set aside an additional five units for low-income renters. L ike the City ’sI

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provisions, the State covenants were binding upon the owner and any successors to the property , b u t they similarly provided that “[ t ] h e provisions of this Ag reement a re

ex p r e s s ly subordinate to the Senior L oan, to the HUD Reg ulatory A g reement, and s ubordinate to all applicable HUD mortg ag e insurance

. . . reg ulations and r elated administrative requirements.” They also provided that “[ i] n the event of foreclosure or transfer b y title of deed in lieu o f foreclosure, any

and all land use covenants contained in this
ag reement shall automatically terminate.”

Once the apartment project was c o m p leted in 2008, Sunny slope and its equity owners qualified fo r f ederal tax credits under the L ow I ncome Hous i n g Tax Credit (“L I HTC”) prog ram. The L I HTC prog ram g ives investors a monetary incentive to invest in low income housing b y providing tax credits rather than traditional cash returns. Those tax credits a

re made available for the first ten y ears a project operates a s affordable housing

. The Sun n y slope apartment project was placed in service i n 2 0 08, so there

were seven y ears of tax c redits remai n ing at the time of the ba n k ruptcy proceeding s described below, estimated to be

wor t h $539,973 per y ear. To receive the tax credits, Sunny slope entered into still anot h er ag reement, requiring that all 150 u n i ts in the project meet the definition o f “low income units” in 26 U .S.C. § 42(i)(3)(A). L ike the financing
ag reements described above, this ag r eement was binding on fu t u r e o wners but the provisions of the ag reement “are

ex p ressly subordinate to the H UD insured mortg ag e or Deed of T rust, to the HUD Reg ulatory Ag r e e ment, and subordinate
to all applicable HUD mortg a g e insurance

. . . reg ulations a nd related administrative r equirements.” The ag reement further provided that “[ i] n the e vent of foreclosure or transfer of titleI

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by deed in lieu of foreclosure, a ny and all land use covenants contained herein shall automatically terminate.”

Unfortunately

, the project was not blessed with g ood
t iming

. I t was completed in 2008, the same y ear that t h e nation suffered a financial crisis, driven in larg e part by the bursting of a housing bubble. Housing prices in much of the nation declined substantial l y , and Phoenix was one of the cities hi t h ardest. W hether or not that was the cause o f distress for this p roject, 1 b y the summer of 2009 Sunny slope defaulted on the Capstone L oan. HUD took the loan over from Capstone.

I n September 2010, HUD sold a packag e of loans to F irst Southern. The Capstone L oan was part of the packag e, and it

was sold to F irst Southern for $5,050,186.24. The l o a n s ale
ag reement provided that the deed o f t r u s t was a valid a nd enforceable lien on the property , subject to “any applicable b ankruptcy

, insolvency

, reorg aniz ation and other laws affecting c reditors’ rig h ts g enerally ” and ex cept for “covenants, conditions and restrictions, rig hts of w a y , easements and other matters of pu b l i c record[ .] ” As part o f the sale, HUD released the HUD Reg ulatory Ag r eement.

F irst Southern, in O ctobe r 2 010, filed a f oreclosure complaint ag ainst Sunny slope in state court and moved for the appointment of a receiver. A trustee’s sale of the project

was n oticed. T he receiver neg otiated an ag reement to sell the property , p ost-foreclosure, for $7,650,000. B efore any sale could be completed, however, Sunny slope’s g eneral p artner filed a petition for involu n tary bankruptcy on J anuary 31,

1 In its b rief

, Su n n y slo p e p o in ts to “ a s u

b stan tial in crease in co n stru ctio n

co sts an d o th er ch allen g es.”I

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2011. The bankruptcy c ourt later entered an o rder converting the involuntary bankruptcy to a voluntary Chapter 11 bankruptcy

. Throug h the bankruptcy proceeding s, Sunny slope soug ht
to retain ownership and control of the property by ex ercising the so-called “cram down” p o w er under 11 U .S.C. § 1325(a)(5)(B ). That power allowed the debtor, Sunny slope,
to keep the property over the o b jection of the secured creditor, F irst Southern, in ex chang e for a new pay ment p lan that would require Sunny slope to pay F irst So u t h ern an amount equal to the present value of the secured claim at the time of bankruptcy

. The value of the allowed s e c u r e d claim is g overned by 11 U.S.C. § 506(a). See Associates Commercial Corp. v. Ra s h

, 520 U .S. 953, 9 57 (1997). The determination of that value is the primary s u b ject o f this appeal.

I n its p roposed p lan of reorg aniz atio n , Sunny slope orig inally asserted that F irst Southern’s secured c laim should be valued at $2.5 million. F irst Southern filed a motion under section 506(a) to determine the amount of its secured claim. F irst Southern’s ex perts valued the p r o p e rty at a bout $7.7 million. T hat value was prem i s ed on the r elease of the affordable housin g covenants, because foreclosure would

ex ting uish them. I n response, Sunny slope’s ex pert valued the property without the a ffordable housing restrictions at $7 million but valued it at $2.6 million i f t he restrictions still applied. The valuation by Sunny slope’s ex pert did not include
any thing f or the value of the tax credits. I n reply

, F irst Southern offered an a dditional report from one of its ex perts opining that with the rent restrictions the property w as w orth $4.885 million and that the tax credits that could be availableI

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if the project were maintained as affordable housing added an additional $2.91 million for a total value of $7.795 million.

The primary difference in the valuations turned on whether the a ffordable housing c ovenants remained in effect to limit the rent that could be collected from the apartments. Sunny slope a

rg ued that they still applied and, as a result, the limit on the amo u nt of rental income that could be realiz ed from the apartments substantially reduced the v al u e o f the project. F irst Southern c o ntended that the restrictions should

no long er apply and that the projec t should be valued according ly

.

The bankruptcy c ourt ag reed with S u n ny slope. I t concluded that the secured value o f t he property was $2.6 million, based on continuing a p p l i cation of the c ovenants, a nd further concluded that the creditor had no rig ht to the value o f the tax credits. The bankruptcy court subsequently confirmed Sunny slope’ s plan of reorg aniz ation and denied F irst Southern’s motion for a stay of the plan.

That reorg aniz a tion plan proposed to pay $2.6 million for F irst Southern’s secured claim o v e r 4 0 y ears at an interest

r a t e o f 4.4 % per a

n num. The balance of F irst Southern ’s claim w ould be p aid as a b alloon p a y ment at the e nd of the 40-y ear term. F unding for the plan was to be provided by the investment of $1.2 million of n e w e q u i ty by Cornerstone at Camelback, L L C (“Cornerstone” )

, which would take over ownership of Sunny slope, and f rom rev e n u e s g enerated b y continued o p eration of the a p a r t m ent complex as affordable housing

.

F irst Southern appealed to the district court, challeng ing both the valuation order and the confirmation order. TheI

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d i s t rict court ultimately held, in an order entered Septem b e r 18, 2 012, that the v aluation was p roperly li m i t ed b y the affordable housing restrictions, but that the valuation should h a ve included the v alue of the tax credits. The matter w a s remanded to the bankrupt c y court f or further proceeding s. The d istrict court als o c oncluded that the bankruptcy court did not err in deny

ing F irst Southern’s motion for a stay

.

F irst Sou t h e rn filed a notice of appeal to this court on October 9, 2 0 1 2
, primarily c ontesting the section 506(a) valuation. Sunny slope responded by filing a notice of crossappeal, contesting the inclusion of the tax cr e d i t s i n the

s e c t i o n 506(a) valuation. T h e clerk of this court issued an

o r d er requiring the parties to brief whether this court h a d jurisdiction o ver the appeal and c ross-appeal, as there was no final order from the district court.

After additional proce e ding s, the bankruptcy court entered a memorandum d e cision on December 12, 2012, determining that the value of the tax credits was $1.3 million, bring ing the secured value o f F irst S o u thern’s lien to $3.9 million. T he bankruptcy court subsequently confirmed a modified plan of reorg aniz ation based on that valuation. F irst Southern appealed to the district court and soug ht a stay

. The district court affirmed the b ankruptcy court’s determinations and declined t o grant F irst Southern a stay

. The
reorg aniz ation plan w as t h e r eafter put into effect; Cornerstone provided its new equity funding and took control of Sunny slope.

F irst Southern filed a second notice of appeal to this court

on J une 6, 2013. Sunny slope a ga i n cross-appealed. Sunny slope moved to dismiss both appeals on the g round of equitable mootness.I

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II. Jurisdiction

Althoug h there may have b een some question as to this court’s jurisdiction follo w i n g the filing of the first notice o f appeal, 2 the district court’s later entry of final judg ment has eliminated that q

uestion. “[ T ] he r

ule in this circuit [ is] that

once a final judg ment is entered, an appeal from a n order that otherwise would have been interlocutory is then appealable.” In re Rains
, 428 F

. 3d 893, 901 (9th Cir. 2005) (quoting In re E a stport Assocs.
, 935 F .2d 1071, 1075 (9th Cir. 1 991 ) ). “W h a tever prematurity e x i sted in [ an appeal from an inte r l o c utory order] was cured by the subsequent entry of a final judg ment.” Id. Thus, we have jurisdiction o ver the issues in both appeals, and we now consider both appeals tog ether.

III. Equitable Mootness

Sunny sl o p e has moved to dismiss these appeals a s equitably moot. “An appeal is equitably moot if the case presents ‘ transactions that are so com p l e x o r difficult to unwind’ that ‘debtors, creditors, and third parties are entitled
to rely on [ th e] final bankruptcy court order.’” In re Mortgages Ltd.

, 771 F .3d 1211, 1215 (9th Cir. 2014) (quoting I n re Thorpe Insulation Co.
, 677 F .3d 869, 880 (9th Ci r.

2 “ Un d er 2 8 U.S.C. § 1 5 8 (a), w e h av e j u risd i ctio n to h ear ap p eals f ro m f in al j u d g m en ts, o rd er[s] an d d ecrees en tered by a d istrict co u rt o n ap p eal f ro m a b an k

ru p tcy co u rt.” I

n r e Fo wler

, 3 9 4 F.3 d 1 2 0 8
, 1 2 1 1 (9 th Cir. 2 0 0 5 ) (in tern al q u o tatio n m ark s o m itted ). T h is co u r t m ay also h ear in terlo cu to ry a p p e a l s b ased o n t h e f lex ib le f in ality ru le, a j u d icially created ru l e u n iq u e to b an k ru p tcy

. S ee id

. (d iscu s sin g th e f

lex ib le f in ality

ru le). T h e p a r t ies h av e disag reed ab o u t th e ap p licab ility of th at f lex ib le f in ality ru le in t

h ese circu m s t an ces, b u t it is n o lo n g er n ecessary f o r u s to

reso l v e th at issu e.I

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2012)); see also In r e T ranswest Resort Properties, Inc.
, 801 F .3d 1161, 1168–73 (9th Cir. 2015). 3

Sunny slope primarily points to the new equity invested b y Cornerstone as the reason to dismiss the appeals as moot. B ecause th e investment was made a s part of a 26 U .S.C. § 1 0 33 ex chang e, it contends that Cornerstone and it s principals would be subject to tax liabilities of more than $1.5 milli o n including penalties and interest if the p lan confirmation order were reversed. I t also arg ues that Cornerstone would be unable to recover a substantial part o f the $ 1

. 2 m illion that it invested in Sunny slope if the p lan were unwound.

This court has identified f o ur factors to help determine whether a case should be deemed equitably moot:

(1) “whether a stay w as soug h t, for absent that

a party has not fully pursued its rig hts”; (2) “if

a stay was s o u ght and not g ained, [ the court] then w i ll look to whether substantial consummation of the plan has occ urred”; (3) “[ t h e court] will look to the effect that a remedy may have on third parties not before the court”; (4) “ [f] i n a lly

, we w ill look at whether the bankruptcy c ourt can f a shion

3 T h e d o ctrin e o f eq u itab le m o o tn ess d i f f ers f ro m A rticle III m oo t

n ess. T h e latter d eals w ith w

h eth er th ere i s an actu al, liv e case o r co n tro ve r sy fo r a co u rt to d ecid e. If th ere is n o t, th en w e lack au th o rity u n d er t h e Co n stitu tio n to p r o ceed

. In co n trast, “ eq u i tab le m o o tn ess” is “ a j u d g em ad e ab sten tio n d o ctrin e” th at is b ased o n a n u n w illin g n ess to alter th e

o u tco m e o f

a p l an o f reo rg an izatio n

in circu m stan ces w

h ere it w o u ld n o t b e eq u i tab le to d o s o

. I

n re Mo rtg a g es , 77 1 F .3 d at 1 2 1 4

– 1 5

. A s i t is a p ru d en tial d o ctrin e, it d o es n o t p resen t a ch allen g e to o u r j u risd i ctio n

.I

N T H E M A T T E R O F S U N N Y S L O P E H O U S I

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e ff

ec t i v e an d e q u i t a b l e relief with o u t completely knocking the props out from under
t h e p l a n a n d t h e r e b y c r e a t i n g a n uncontrollable situati o n b efore the bankruptcy court.”

Id. at 1217 (quoting In re T h orpe Insulation

, 677 F .3d at 881).

Generally

, in de t ermining equitable mootness, and in particular with reg ard to the fourth factor in the analy sis, the
power to g r ant equitable r elief, w e h ave noted t h a t “[ t] he party asserting mootness has a heavy burden to establish that there is no effective relief r emaining for a court to provide.” In re Focus Media, Inc.
, 378 F

. 3d 9 16, 923 ( 9th Cir. 2 004) (quoting I n re Pintlar Corp.
, 1 24 F .3d 1310, 1312 ( 9 t h C i r. 1997)). W e conclude that Sunny slo p e h as not carried that burden.

F irst Southern applied for a stay in the bankruptcy court and then ag ain in the district c ourt. T h o s e a p plications were denied. F irst Southern d id n ot a ppeal the denial of the stay to this court, asserting that it was misled b y Sunny slope as to the need to do so, but it did file two separate notices o f appeal. These made p lain its int e n t t o pursue the matter on appeal. W e conclude that the failure to seek a stay from this court is
not fatal to the current appeal and that F irst Southern’s efforts
to obtain a sta y f

r o m t he b ankruptcy court and the district
court w ere sufficient to sati s f y t h e first factor. We have previously declined to dismiss appeals based on e q u i t a ble
mootness w hen, as here, the a g g rieved party applied for a stay to the bankruptcy court and appealed to the district court but did not further p u r s ue a stay motion to this court. See I n re Focus Media , 378 F .3d at 924; In re Mortgages
, 771 F .3d atI

N T H E M A T T E R O F S U N N Y S L O P E H O U S I

N G 17

1216; In re Trans w e s t , 8 0 1 F .3d a t 1168. The reality is that this c ourt does not o ften g rant st a y s i n circumstances like these. A secured creditor mig ht be wise to e r r o n t he side o f caution and s eek a stay from this court, but the failure to do

s o in this case should not, we c onclude, mean that th e s e appeals should be dismissed as moot. 4

As for the second factor, the plan as a pproved by the bankruptcy court was substantia l l y consummated, a s all parties a cknowledg e. Cornerstone invested the new e quity funding and took over Sunny slope.

The question posed by the third factor is “whet h e r modification of the plan of reorg a niz ation would bear unduly

o n t he innocent.” In re Thorpe Insulation

, 677 F .3d a t 8 8 2 ;

see In re Transwest
, 801 F

. 3 d at 1169. I n our view, the unraveling of the p lan would not have a n e ga tive effect on parties intended to be p rotected by the doctrine of equitable mootness, namely innocent third parties not before the court.

The key third p a r

ty w ho would be affected by the unraveling of the p lan is the n ew e q uity investor under the plan, Cornerstone. W hile no t a p a rty before the court in its
own name, it is here in the g u ise of Sunny slope. Sunny slope concedes that Cornerstone is now the equity owner o f Sunn y s l o p e. More broadly

, Cornerstone is not the k ind o f

4 Su n n y slo p e co n t en d s th at t

h e a g g r i e v e d p arty is req u ired to ap p eal a d en ial of a stay t o th is co u rt an d th ereaf ter to th e Circu it J u stice, citin g In

re Ro b erts Fa rms , 6 5 2 F.2 d 7 9 3, 7 9 8 (9 th Cir. 1 9 8 1 )

. B u t ou r l ater d ecisio n in Fo cu s Med ia lo o k ed on ly to see if th e p arty so u g h t a s tay f ro m th e b an k ru ptcy co u rt an d th e d istrict co u rt. In Ro b erts Fa rms , th e p arty did

n o t ev en seek a stay f

ro m t h e b an k ru p tcy co u rt, so th e q u estio n o f w

h at f u rth er s tep s b ey o n d th at h ad t o b e tak en w as n o t b ef o re th e co u rt. 6 5 2 F.2 d at 7 98

.I

N T H E M A T T E R O F S U N N Y S L O P E H O U S I

N G 18

i nnocent third party the doctrine of e q uitable mootness i s intended t o p r o t e c t

. C ornerstone’s principals a re sophisticated investors. They decided on their own to obtain funds f or this investment via an ex chang e t r ansaction that posed potential
tax risks if something went w r o ng

. Cornerstone was i n t i m ately involved in the d evelopment of the plan under which they

took over Sunny slope. I t knew that the valuation
upon wh i c h the plan was based was v ig orously disputed b y F irst Southern. Cornerstone’s primary principal, Mr. Aronson, served as one of Sunny slope’s main witnesses. Cornerstone knew that F irst So u t h e rn had filed notices o f appeal. The failure of F irst Southern to seek a stay from this
court could not have g iven Cornerstone reason a b l e c ause to conclude that F irst Southern had a b andoned its challeng e

. Cornerstone made a conscious d ecision to pr o c e ed nonetheless. T he attempt to characteriz e C o r n e r stone a s an innocent third party

to invoke dismissal of the appeal on the
g round of equitable mootness is unconvincing

. Sunny slope arg ues that the City of Phoenix and the State of Ariz ona were also innocent third part i e s t hat would be ha rm e d by the unraveling of the plan. B ut no additional investment was made under the plan by either the City or the State. Nor, as juni o r s e c u red creditors, are they third parties absent from the proceeding s, unab l e to protect themselves. They h ave leg itimate interests as creditors and a s sponsors o f affordable housing

, but those interests d o n o t su p port dismissal of the a

ppeal on the g round of equitable mootness.

The fourth fa c t o r , w hether the bankruptcy court can fashion e ffective and e quitable r e l i e f, is g enerally the most imp o rtant of the four factors. In re Thorpe Insulation

, 677 F .3d at 883. B ut Sunny slope’s objection here is not really that the transactio n s c a

nnot p ractically be unwound. TheI

N T H E M A T T E R O F S U N N Y S L O P E H O U S I

N G 19

transactions were not that complex . The arg ument, rather, is that the unwinding would have a substantial n eg ative impact

on Cornerstone. That m a y b e true, but as discussed above, Cornerstone is not the kind of innocent third party the doctrine of equitable mootness is desig ned to protect.

W e deny Sunny slope’s motion to dismiss the appeals a s equitably moot.

IV. Section 506(a) Valuation

This court reviews de novo a district court’s decision on

an appeal from a bankruptcy court and thus applies the same

s t a n dard of review applied by the district court. In re A F I Holding, Inc.
, 525 F. 3 d 7 0 0
, 702 (9th Cir. 2008). No de fe r e nce is owed to the d istrict court’s decision. Id. “The bankruptcy court’s finding s of fact a re r e v iewed for clear
error, while its conclusions of law are reviewed d e novo.” I n

re JTS Corp.
, 6 17 F

. 3d 1102, 1109 ( 9th Cir

. 2010) (internal quotation marks omitted). This court will “accept the bankruptcy court’s finding s of fact, u nl ess the court is left with the definite and firm conviction that a mistake has been committed.” I

d. (citation and quotation marks omitted).

The p rimary question posed here is whether the affordable housing rest r i c t i ve covenants should affect the valuation o f F irst Southern’s secured claim under section 5 06(a). The facts

re l a t e d t o that issue are not seriously in dispute. A s noted above, Sunny slope’s own e x pert, while valuing th e s ecured claim as w o rth $2.6 million if the covenants still applied, conceded that the value was $7 million if they d id not. W e conclude, as a matter of l a w , that the r estrictive provisions should not apply to limit the value of F irst Southern’s secured claim.I

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N G 20

The starting point is that F i r st Southern as a secured creditor stands in the first position. I t obtained t h e r i g hts o f the senior lende r f

rom HUD. HUD a cquired the Capstone L oan after it fell into default, sold it to F irst S outhern, a nd released F irst Southern from the requirements of the HUD Reg ulatory Ag reement. F irst Sout h ern’s secured c laim is superior to the rig hts of other secured creditors.

All o f the restrictive covenants and other provisions that Sunny slope seeks to invoke to limit the project to affordable housing and to the r educed rental income that w o u ld be collected a s a result are derived from positio n s that were junior and ex pressly subordinated to the Capstone L o a n. The
ag reement re l a t e d to the City of Phoenix loan, for instance,
states that “the provisions hereof are ex pressly subordinate to the HUD insured mortg a g e or D e ed of Trust, to the HUD Reg ulatory A g reement, and subord inate to all applicable H U D m ortg ag e insurance

. . . r eg ulations and related

a d m i n i s t r a t i v e r e q u i r ements.” They further provided that “[ i] n the event of foreclosure or transfer o f title by deed in lieu o f foreclosure, any

and all land use covenants contained herein shall automatically terminate.” I f there were a f oreclosure sale, there is no doubt that the restrictive provisions would be swept a way , g iving F irst Southern’s interest a v a lue of at least $7 million.

Due to the bankruptcy proce e d i n gs, there h as not been a foreclosure sale. B ut that does not mean that t h e s e cured value of F irst Southern’s secured claim may be suppressed b y conditions subordinated to its position a nd attached to loans made by junior creditors.

S e c t ion 506 of the B ankruptcy Code provides for the
recog nition in bankruptcy of the claim of a secured creditor:I

N T H E M A T T E R O F S U N N Y S L O P E H O U S I

N G 21

An a llowed c l a im o f a creditor secured by a l i e n on property in which the estate has a n interest

. . . is a secured claim to the ex tent o f the value o f s u c h creditor’s interest in the estate’s interest in such property , . . . and is an unsecured claim to the ex tent that the value o f

s u ch creditor’s interest

. . . is less than t h e

am o u nt of such allowed c laim. Such value shall be determined in lig h t o f the purpose of the valuation and of the proposed disposition

o r u s e of such property , a nd in conjunction with any h e a

ring on such disposition or use o r on a plan affecting such creditor’s interest.

11 U.S.C. § 506(a)(1).

I n Associates Commercial Corp. v. Rash

, 5 2 0 U .S. 953 (1997), the Supreme Court applied this section in the c ontex t of a bankruptcy cram down. Rash purcha s e d a tractor truck for use in his freig ht hauling business. He made a down
pay ment, ag reed to pay the remaining amount in 60 monthly installments, and p ledg ed the tru c k a s c ollateral. The seller assig ned the loan and the truc k l i e n t o a third party , ACC. Rash and his wife later filed for bankruptcy

. At that time the balance o wed to ACC on the truck loan was $4 1
, 1 71. Id. at 956. The deb t o r ex ercised the cram down power under section 1 325(a)(5)(B ), w hich al l o w s a debtor to retain the property over the objection of a secured creditor. Id. at 957.

The dispute there, a s here, concerned the valuation of the creditor’s secured claim. The creditor arg ued that the proper valuation was “the pri c e t h e Rashes would have to pay to purchase a like vehicle,” id

. , e stimated to be $41,000. The debtor, in contrast, arg u ed that the proper valuation was “theI

N T H E M A T T E R O F S U N N Y S L O P E H O U S I

N G 22

net amount ACC would realiz e upon foreclosure and sale of the collateral,” id ., estimated to b e $31,875. The bankruptcy
court and the district court ag reed with the d ebtor, and so did th e Fi f t h Circuit sitting e n banc, b ut the Supreme Court did
not. The Court held that r e p lacement value was the proper measure in that case.

The Court hig hlig hted a p ortion of the second sentence o f section 506(a) in determining the value of the secured portion of the c laim: “Such value shall be determined in lig h t o f the
purpose o f t h e valuation and of the proposed disposition o r

use of such property .” I d

. at 961. I t treated the phrase “proposed disposition or use” of the collateral as identify ing
two a lter n a t i v es: “in one case the collateral w ill be surrendered to the c r editor, and in the other, the collateral will be retained and used by the d e b tor.” Id

. a t 962. The Court

c o n c luded that a “replacement-value” standard “disting u is h e s retention from surrender and renders m e a n i ng ful the key words ‘disposition or use.’” Id

.

I n the Rash case, as here, the d ebtor elected to retain the property and use it in his business, over the objection of the secured c reditor. Sunny slope t h u s arg ues that Rash requires the rejection of the “foreclosure value” and the application o f “replacement v alue” here, which it defines as the value of the property when used for a f fordable housing

. Th a t inference
g oes astray in two separate way s.

F or one, it takes the r eference to “u s e ” i n Rash a nd in section 506(a) as meaning the particular use to w h i c h t h e debtor elects to devote the property , in Sunny slope’s case as affordable housing

. B u t R ash interpreted “use” simply to

m e an the alternative to “surrender.” Rash decided to retain the truck rather than g ive it u p. N othing in the Court’sI

N T H E M A T T E R O F S U N N Y S L O P E H O U S I

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decisio n s u pports the proposition that the “replacement value” of the p roperty should be measured by the income that

can be g e nerated w h e n u s ed in the specific way that the debtor elects to use it. There was no discussion in R ash of the income stream that Rash mig h t r ealiz e from using the t ruck in his freig ht hauling b u siness. I nstead, replacement value

was variously described as “ what the debtor would have to pay f or comparab l e property ,” id

. at 9 55, or “ the price the Rashes would have to pay to purchase a l i k e vehicle,” id

. at 957, o r “the price a willing b u y e r in the debtor’s trade, business, or situation would pay to obtain like property from

a willing seller,” id

. at 960. The cost to bui l d o r b u y an

a p artment complex like Sunny slope would be much m o r e than the valuation of F irst Southern’s secured claim asserted by Sunny slope and allowed by the district court.

F or another, Sunny slope fails to a p preciate how the facts of this ca s e d i v e r ge from the facts in Rash

. I n that c ase, the “replacement value” was hig her than the “foreclosure value.” That is usually the case. As Rash ex pre s s l y recog niz e d, the foreclosure v alue is “ty

pically lower.” Id

. at 960. I n our c ase, however, the foreclosure value is acknowledg ed to be at least $7 million, because a foreclosure would eliminate the affordable housing restrictions, while the “fair market value” based o n an income stream method of valuation that accounts for the affordable housing restrictions is substantially less.

Di s reg arding “foreclosure value” in favor of an income
stream valuation based on the a uthority of Rash ig nores what the Court said about the reason for using the rep l a cement value instead:

W h en a debtor sur r e nders the property , a creditor obtains it immediately , and is free toI

N T H E M A T T E R O F S U N N Y S L O P E H O U S I

N G 24

sell it and reinvest the proceed s.

. . . I f a debtor keeps the property and continues to use it, the creditor o btains at o nc e neither the property nor its v alue a n d is ex posed to double risks: The debtor may ag ain default and the property may deteriorate f rom

ex tended use. Adjustments in the interest rate and secured c reditor demands for more

“ ad eq uate protection,” 11 U.S.C. § 361, do not fully offset these risks.

I d

. a t 9 6 2

– 6 3

. A p p l y i n g t h e r e p l a c e m e n t v a l u e standard—establishing a value hi g her than the f oreclosure value—was deemed b y the Court to b e more appropriate in lig ht of the double r isks that must be borne by the creditor. Sunny slope’s proposed inco m e stream valuation does not account for the double risks. T o the contrary , it imposes them

on the cre ditor at the same time that it provides the creditor with a value a

bout one-third of what the creditor could obtain if the property

were surrendered.

Rash does not support assig n ing a v a l ue to F irst Southern’s secured interest b ased o n a method of valuation that is substantially lower than the replacement c ost of the property

. The replacement cost of a like pr o p e r t y is the standard that Rash commands, and the standard that should have been applied. 5

5 T h e d i ssen t arg u es, at 3 7

– 3 9
, th at o u r o p in i o n f ails to d eterm in e v alu e

w ith reg ard to th e f

act th at S u n

n y slo p e p ro p o ses to u se th e p ro p erty as an af f o rd ab le h ou sin g co m

p lex

. Bu t Ra sh d o es n o t au th o rize th e b an k ru p tcy

v alu atio n to be based o n th e in co m e stream t h at w o u ld b e d eriv ed f

ro m th e

u s e o f pro p erty as an af f o rd ab le h ou sin g co m

p lex

. It h o ld s th at “t h e rep lacem en t- v alu e s t a n d ard accu rately g au g es th e d eb to r’ s ‘ u s e’ o f th e p ro p erty .” 52 0 U.S. at 9 6 3

. Rep l acem en t v alu e i s a m easu re o f w h at i tI

N T H E M A T T E R O F S U N N Y S L O P E H O U S I

N G 25

Under section 1 325(a)(5) o f the Code, a plan’s treatment of a secured claim can be confirmed if one of three conditions is satisfied: the c r e d i tor accepts the plan, the debtor surrenders the property , or the debtor invokes the cram down
power. R ash

, 520 U.S. at 957. That cram d own option permits confirmation of a plan u n d e r w hich the debtor will retain property subject t o t he creditor’s security interest over the objection of the creditor—the plan is “ cra m m e d down the throat[ ] of [ an] objecting creditor[ ] .” Kham & Nate’s Shoes No. 2, Inc. v. First B ank o

f W hiting

, 908 F .2d 1351, 1359 (7th Cir. 1990). B ut that option does not a u thoriz e shortchang ing the creditor w ith reg ard to its current secure d v alue. The
statute protects the creditor to the ex tent of that secured value. Rash

, 5 20 U.S. at 957. I t does not authoriz e a s u bstantial reduction in the a mount of the secured value simply because th e b a n kruptcy process itself means that the creditor cannot actually foreclose on the property

.

I n this instance, F irst Southern does n o t have a secured claim in the full f

ace amount of the note, $8.5 million, because the p roperty was not worth that much at the time o f the bankruptcy valuation. F irst Southern d o e s not contend

w o u ld co st to p ro d u ce o r acq u ire an eq u i v alen t p iece o f p ro perty , in th at in stan ce “ th e p rice th e Rash es w o u ld h av e t o p ay to p u rch ase a lik e tracto r.” Id

. at 9 57

. T h e seller o f th e tracto r w o u ld n o t b e ex p ected to sell it to th e R ash es ch eap er becau se th e Rash es p lan n ed to u se it in a w ay th at

w o u l d n o t g en erate m

u ch i n co m e. J u st as th e rep lacem en t v a l u e o f a tracto r w o u ld n ot tak e in to acco u n t th e b u y er’ s an ticip ated u se o f th e tracto r, th e rep l acem en t v alu e o f a 1 5 0

- u n it ap artm en t co m plex d o es n o t tak e in to acco u n t th e fa c t th at th ere i s a restrictio n o n th e u se o f th e

co m plex

. T h u s, co n trary to th e d issen t’ s assertio n , at 4 0
, th at w e are u sin g

a f o reclo su re m et h o d o f v alu atio n , w e m erely co n clu d e th at it w as

erro n eo u s t o f

acto r th e restrictiv e co v en an ts in to th e rep lacem en t v alu e of Su n n y slo p e.I

N T H E M A T T E R O F S U N N Y S L O P E H O U S I

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that its secured claim should be valued that hig hly

, but even if it did, its claim would properly be rejected and it could be forced to accept the r e d u ced present value of its secured claim. B ut the B ankruptcy Code does not authoriz e the further reduction in F irst Southern’s secured value asserted b y Sunny slope. The “cram down” does not g o that far.

Sunny slope a

rg ues that valuing F irst South e rn’s secured interest without reg ard to the affordable housing restrictions will have t h e neg ative effect of eliminating the use of the Sunny slope project for a f

fordable h ousing

. T h at is likely true, and it is, in an immediate sens e , u n fortunate. B ut from a b r oader perspective, failure to recog n iz e the priority of a senior se cured creditor would discourag e lenders from making the loans in the first place o r would make those loans much more ex pensive. F u ture prospective le n d ers would have
to factor in the ri s k that the value of their secured interest would be substantially diminished. I t w ould, in addition, surely make it much more difficult for HUD to sell defaulted loans on the secondary market and woul d drastically reduce the a mount that HUD could obtain f rom r eselling those loans. Consid er what a buy er would pay f or HUD’s loan to Sunny sl o p e if it were known that the affordable housing restrictions would remain in place. HUD would either be saddled w ith more underperforming loans that i t c ould not sell or would salvag e substantially less money f rom defaulted loans, leaving it with substant ially less money for future projects.

H U D c ould have desig ned the financing in the wa y t h at Sunny slope advocates, by c onditioning the sale of the Capstone L o an to F irst Southern on continued application o f the Reg u latory Ag r eement. I n stead, it ex pressly released that
ag reeme n t

. Similarly

, the Capstone L oan could have beenI

N T H E M A T T E R O F S U N N Y S L O P E H O U S I

N G 27

made subject to the various affordable housing covenants a nd restrictions related to the Phoenix I DA financing

, the City loan, the State loan, and the tax credits, but that is not h ow the deal was put tog ether. T h o s e provisions were ex plicitly subordinated to the Capstone L oan. W e cannot disreg ard the terms of the ag reements.

Sunny slope also complains that F irst Southern should not benefit from knowing ly undertaking wh at Sunny slope describes a s a “hig h risk/hig h r eward” transaction, a point echoed in the d issenting opinion, at 37. B ut the same description could b e a

p plied to Sunny slope’s new o wners. I t is not persuasive for the pot to call the kettle black. There is

no reason why Cornerstone should be uniquely immune from the risks that it knowing ly undertook.

More importantly

, the arg ument f ails to appreciate that F irst Southern stands in the shoes of th e o r i gi nal lender, C a p s tone or, in practical terms, HUD. Suppose HUD (or Capstone) still owned the loan. As the senior lender, its rig hts would seem clearly

established, and Sunny slope’s arg ument that the secured value o f HUD’s posi t i o n should be reduced because of the affordable housing restrictions, based on junior financing ex pressly subordinated to HUD’s p osition, would lack f orce. HUD’s position was full y c o nvey e d to F irst Southern; there is no claim that HUD held any thing back for itself. Similarly

, there is no claim that F irst Southern was not a bona fide purchaser of HUD’s interest, so there is no basis
to treat F ir s t S outhern as having an interest less than the interest HUD would have.I

N T H E M A T T E R O F S U N N Y S L O P E H O U S I

N G 28

The value assig ned by the bankruptcy c ourt t o Fi rst Southern’s secured interest did not accurately reflect t h e actual value of that interest. 6

V. Conclusion

Valuing F irst Southern’s secured interest as if the affordable h ousing restrictions related to subordinated positions still applied was n o t appropriate under section 506(a). As a result, the plan of reorg aniz ation confirmed b y the bankruptcy court and affirmed by the district court must be set a side. I t was b a s e d o n an improper valuation o f F irst Southern’s interest. W e reverse the judg ment of the district court and remand for additional proceeding s consistent with this opinion.

REVERSED and REMANDED.

PAEZ , Circuit J udg e, dissenting :

I do not ag ree w ith the majority that the bankruptcy court erred in its valuation of F irst S o uthern’s collateral under 11 U.S.C. § 506(a). I n my view, a straig htforward application o f the Supreme Court’s decisi o n in Associates Commercial Corporation v. Rash

, 520 U.S. 953 (1997), c ompels valuing F irst Southern’s collateral—a 150-unit apartment c omplex

— in lig ht of S u n n y s l ope’s proposed use of the property in its

6 In l ig h t o f o u r reso l u tio n o f th is issu e, it is n o t n ecessary f o r u s to

co n sid er o t

h er arg u m en ts m ad e b y th e p arties, in clu d in g treatm en t o f th e tax cred its an d t he ap p ro p riate in t erest rate on p ay m en ts o w ed to First So u th ern u n d er th e p lan

.I

N T H E M A T T E R O F S U N N Y S L O P E H O U S I

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p lan o f reorg a

niz ation as affordable housing

. I therefor e respect fully dissent from the majority ’s holding that Sunny slope’s proposed use o f the property and the attendant restrictive covenants should not affect the value of First Southern’s secured claim. 1

I n reversing the b ankruptc y court’s valuation ruling

, the majority errs in several major r espects, which all relate to its misapplication of the Supreme Court’s d ecision in Rash

, the key case in this appeal. Therefore, I beg in with a discussion of R ash and two l o wer-court o pinions helpful in understanding its holding

. I then address the errors that result from the majority ’s misapplication of Rash

. I n t h e e nd, I would affirm the bankruptcy court’s order valuing F irst Southern’s collateral at $3.9 million.

I

.

A s the majority makes clear, F irst Southern’s secured claim must be valued according to section 506(a )

, w h ich provides:

An a ll o wed claim o f a creditor secured by a lien o n property in w hich the esta t e h as an interest

. . . is a secured claim to the ex tent o f the value o f such creditor’s interes t i n the estate’s interest in such property , . . . and is an unsecured claim to the ex tent that the value o f such c reditor’s interest

. . . is les s t han the
amount of such allowed claim. Such value

1 I ag ree w ith

th e m aj o rity

th at First So u th ern ’ s ap p eal is n o t eq u itab ly

m o o t. S ee In re Tra nswest Reso r t Pro p erties, In c. , 8 01 F.3 d 1 1 61
, 1 1 6 8 (9 th Cir. 2 01 5 ).I

N T H E M A T T E R O F S U N N Y S L O P E H O U S I

N G 30

shall be determined in lig h t o f the purpose of the valuation and of the proposed disposition

or u se of such property , a n d i n conjunction with any h e a

ring on such disposition or use o r on a plan affecting such creditor’s interest.

11 U.S.C. § 506(a)(1).

A p roper u nderstanding of the Supreme Court’s interpretation o f section 506(a) i n Rash

, and the majority ’s

erroneous application, beg ins with our decision in I n re Taffi

, 96 F .3d 1190 (9th Cir. 1996) (en banc). I n Taffi

, the I RS h ad attached a lien t o t h e Taffis’ h ouse to secure pay ment for a tax l i a b i l i ty

. Id. at 1191. The parties disputed the value o f the I RS’s secured interest in the house. The Taffis advocated for a foreclosure value—that is, the a mount the house would sell for under forced sale conditions. The I RS arg ued that the claim was worth whatever a willing and inform e d buy er would pay for the house under market conditions—what this
court referred to as the “fair market v al u e .” Althoug h the bankruptcy court determined that the for e c l o s u r e value should apply , sitting en banc we disag reed. Id. at 1191–92.

The en b a nc court answered the same question we confront h ere: “what is t h e a ppropriate method of valuation prescribed i n a reorg aniz ation under Chapter 11 where collateral is retained by the debtors for the debtors’ u se? ” Id. at 1192. The court answered the question thus:

W h en a Chapter 11 debtor or a Chapter 13 debtor intends to retain p roperty subject to a lien, the purpose of a valuation under section 506(a) is not to determine the a mount the creditor would receive if it hy pothetically h adI

N T H E M A T T E R O F S U N N Y S L O P E H O U S I

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t o f oreclose a

nd sell the c ollateral. Neithe r the foreclosure value nor the costs o f repossession are to be considered because no foreclosure i s intended. I nstead, w hen the proposed use of the property is continued retention by the debtor, the purpose of the val u ation is to determine how much the cred i tor will receive for the debtor’s continued possession. . . .

I n this case, the key fact is that the debtors

are g oing t o possess the House. T his fact determines the disposition and use of the creditor’s interest. Th e foreclosure value is
not relevan t because no f oreclosure is in tended by the Plan. The T affis are in, not out side of, bankruptcy

. The I RS is not foreclosing

. Valuation must be accomplished

w i t h i n t h e actu a l s i t u a t i o n p r e s e n t ed

. Conseq u ently

, the value h as to be the fair market value of what the debtors are using

.

Id. I n reversing the bankruptcy co u r t and adopting a fair market value approach—“the price which a willing seller

. . . and a willin g buy er

. . . would ag r e e upon after the property has b een ex posed to the market for a reasonable time,” id. —the d e c ision “put this circuit in harmony with all other circui t s , ex cept the F ifth, that have considered the question[

. ] ” Id. a t 1193.

The F ifth Circuit had reached the opposite conclusion in

a case decided the same y ear. I n In re Rash

, 90 F .3d 1036 (5th Cir. 1996) (en banc), the debtor also elected to retain the collateral, a tractor truck, securing the creditor’s l i e n in aI

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C hapter 1 3 cramdown. The creditor a r g ued that the truck’ s value should be determined b ased on “what it would cost the debtors to purcha s e a n identical vehicle,” that is, its replacement v alue. Id. at 1 038. B o th the bankruptcy court and the F ifth Circuit, sitting en banc, disag reed. Id.

The F ifth Circuit interpreted the tex t a n d structure o f section 506(a) to militate ag ainst replacement val u e

. The
court determined that the fir s t s entence of the statutory tex t required valuing “the creditor’s interest in the estate’s interest in” the secured property based on “the value of the collateral
to the creditor .” Id. at 1044. The court also rejected the creditor’s arg u ment that the bankruptcy court contravened the statute’s “proposed disposition or use” lang uag e in the second
sentence b y ig noring the Rashes’ p roposed u s e o f the truck and instead valuing it according to what the credit o r would realiz e in a hy

p othetical d isposi t i o n

. Id. at 1047. The court d i s a gr eed that just “because the collateral is being r etained and used by the debtor, its value is necessaril y m e a s ured b y its worth to the debtor.” I d

. at 1047–48. The Fi ft h Circuit

e mbraced the foreclosure value over a vig orous disse n t , which a rg ued that “Section 506(a) is not difficult to interpret. Read as a whole, it p lainly means that when a reorg a niz ing debtor retains and uses collateral, we must value the property according t o its w orth to the debtor (the actual user), not to the creditor (a purely hypotheti c a l seller).” Id. at 1061 (Smith, J ., dissenting ).

T h e S u p reme Court reversed. Rash

, 520 U.S. at 959. I nterpreting section 506(a), the Court held that the t r u ck’s value w a s “the price a willing buy e r in the debtor’s trade, business, or situation would pay to obtain like property from

a willing seller.” Id. at 960. The Court referred to this as the “replacement value,” but e x plain e d that its use of that termI

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was consistent with the Ninth Circuit’s understanding of the
term “fair market value” in Taffi : “the price a wil l i n g buy er in the d ebtor’s trade, b u s i n e ss, o r situation would pay a willing seller to obtain property of l i k e a g e and condition.” Id. at 959 n.2.

The Court beg an by ex p ressly r e jecting the F ifth Circuit’s “startin g point”—what the creditor could realiz e in a foreclosure sale. Id. at 960–61. The first sentence of section 506(a) contains n o such requi rement, the Court concluded. I t instructs only that the secured portion of a creditor’s claim is limited to the value o f the collateral; i t s ay s nothing o f

“ how that interest is to be valued. ” Id

. a t 961 (emphasis in orig inal )

. I nstead, the second sentence’s “proposed disposition or use” lang uag e “is of paramount importance to the valuation question.” I d. a t 962. The Court concluded that the “disposition or use” of the collateral turns on the debtor’s alternative c hoice to s u r r e n d er collateral or retain a nd use it
purs u a nt to the cramdown provision, see 11 U .S.C. § 1 3 25(a)(5), and that “[ a] pply ing a foreclosure-value standard when the cram d own option is invoked attributes no sig nificance to the d ifferent conseq u ences of the debtor’s choice

. . . .” Rash

, 520 U.S

. a t 9 6 2

. I n contrast, using replacement value disting uishes between r etent i o n a nd surrender, “renders meaning f ul the key words ‘disposition o r use,’” id.

, and “accurately g aug es the d ebtor’s ‘use’ of the
p r o perty

. . . in lig ht of the p roposed repay ment p l a n reality [ .] ” Id. at 963 (alterations and quotation marks omitted). Thus, the Court interpreted section 506(a) to require valuing property retained by a debtor as “the cost the debtor would incur to o b tain a like asset for the same ‘proposed

. . . use.’” I

d

. at 965. On the facts p r e sented in Rash

, the debtor “elected to use the collateral to g e nerate an income stream. T hat actual use, rather than a foreclosure saleI

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that will not take place, is the proper g uide . . . .” Id. at 963;

see also id. at 964 (“Section 506(a) c alls for the v alue the
p r o p e rty p ossesses in lig ht of the ‘disposition or use’ in fa ct ‘proposed,’ not the various disposition or uses that m ig ht have been proposed.”).

The Supreme Court’s instruction in Rash is p lain, a nd its application straig htforward. W hen a debtor retains collateral in a c ramdown as in this case, its value turns on the debtor’s

“ a ctual u se” of the collateral a s proposed in t h e reorg aniz ation p lan, id. at 9 63–64—not on a hy pothetical foreclosure value. As a leading treatise ex plains,

The import of Rash is thus relatively clear: for
purposes of determining the amount that must be paid to a secured creditor in the cramdown
contex t, the question of value under section 506(a) turns on the value of t h e debtor’s proposed use of th e relevant p roperty under
t h e plan, n ot the value achievable i n a foreclosure scenario that is not prop o s ed. T h i s i s t h e c a s e e v e n t h o u g h t h e reorg aniz ation m a y ultimately fail and the creditor may foreclose o n its collateral as a result.

2 A lan N. Resnick & Henry J

. S o mmer, Collier B ankr. Manual ¶ 506.02[ 6] [ a] (4th ed. 2015); see also id. ¶ 506.02[ 7] [ d] [ I ] (apply ing R ash to establish value in Chapter 11 cramdowns where the debtor retains the collateral). That value is measured by what t h e debtor would pay for a “like
asset for the same ‘proposed

. . . use,’” Rash

, 5 20 U.S. at 965,

or put differently

, b y “what a willin g buy er in the debtor’sI

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trade, business, or situation w ould pay to obtain like property [ ,] ” id. at 960.

Here, Sunny slope proposed in the reorg aniz ation plan to

use the property to provide affordable housing

, and in fact that was and remains the only permissible use of the property because of the rest rictive covenants—unless and until postconfirmation default and foreclosure. “That actual u se, rather than a f oreclosure sale that will not take place, is the proper g uide

. . . .” Id. at 963. Be c a u s e any willing b uy er in Sunny slope’s trade or business would take “like” property for the p urpose of providing affordable housing an d s u bject to similar restrictive covenants, the c o l l ateral’s v alue must be determined in lig ht of the same p urpose and burdens. See Taffi

, 96 F .3d at 1 192 (“ Valuation must be accomplished within the actual situation presented. Consequently

, the value has to be the fair market value of what the debtors a re using

. ”). T he bankruptcy c o urt ther e f o r e did not e rr in valuing the property

as affordable housing

.

I I

.

A.

T he foreg oing discussion illuminates the majority ’s

errors. Critically

, the majority beg ins from the same

erroneous “starting point” a s d id the F ifth Circuit in its Rash

en banc opinion

, valuing the collateral from the creditor’s perspective. I n d e e d, the majority even borrows the same “starting point” lang uag e. Compare Maj. Op. 2 0 (“The starti n g p o int is that F irst Southern as a secured creditor stands in the first position.

. . . F irst Southern’s secured claim is superior to the rig hts of other secured c reditors.

. . . I f there

were a f oreclosure sale, there is no doubt that the restrictiveI

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provisi on would b e swept away .”), with Rash

, 90 F

. 3d at 1044 (describing

the “log ical starting point for valuation” a s “what the creditor could realiz e if it sold the estate’s interest in the property according to the security ag reement, taking into account the rig hts of other creditors w ith liens secured b y the estate’s interest”), a nd Ras h

, 90 F .3d at 1051 n.18 (reading section 5 0 6 ( a) to “sug g est[ ] a valuation that starts with what the c reditor c o u ld realiz e by repossession a nd sale of the collateral”).

B u t the Supreme Court ex pressly rej e cted starting the valuation from the creditor’s perspective. See Rash

, 5 20 U.S.
at 960–61. I nstead, the Court directed valuation from the debtor’s perspective. Id. a t 963 (“Of prime sig nificance, the replacement-value standard accurat e ly g aug es the debtor’s ‘use’ of the property .”); see also Taffi

, 96 F .3d at 1192. The majorit y o pinion ig nores this directive, instead adopting the

a pproach utiliz ed by the F ifth Circuit in its en banc opinion and advocated by J ustice Stevens’s diss e nt in Rash. See 520 U.S. at 9 66 (Stevens., J
., dissenting ) (“[ T] he value should be determined from the creditor’s perspe ctive, i.e.
, what the collateral is worth, o n the open mar k et , i n the creditor’s hands, rather than in the hands of another party .”).

B

.

The maj o rity ’s erroneous focus o n F irst Southern’s perspective stems from a concern that the bank g ot a raw deal in lig ht of its senior position. At the outset of its analy sis, the majority recog niz es that no fo r e c losure sale occurred, y et nonetheless concludes, “B ut that does not mean t h a t the secured value of F irst Southern’s secured c laim may be suppressed by conditions subordinated to its positio n a n d attached to loans made b y junior creditors.” Maj. Op. 20.I

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Rash instructs, however, that the priority of F irst Southern’s secured claim with respect to other creditors simply has no place in an analy sis that “turns on the v alu e o f the debtor’s proposed use of the relevant property under the plan.” 2 Resnick & Sommer, Collier B ankr. Manual ¶ 506.02[ 6 ] [ a]

.

I n any event, the majority ’s concern is misplaced. F irst Southern purchased its interest knowing that covenants restricted the p roperty ’s use. When the bank purchased the rig hts o f the senior lender from HUD, HUD ex pressly warranted in th e l o a n sale ag reement that F irst Southern would obtain “a valid and enfor ceable lien on the r elated Mortg ag ed Property

having the lien priority indicated on the Mortg ag e L oan Sch e dule, e xcept for

. . . (5) covenants, conditions and restrictions, r ig ht s o f way , easements a nd other matters of public record[ .] ” (emphasis added). Althoug h HUD released F irst Southern from the Reg ulatory Ag reement, i t did not purport to v itiate the other restrictive
covenants requiring the property to be u s ed as affordable housing

. Those publicly recorded restrictions, w hich r u n with the land, arose from a g reements subordinate to the loan F irst Southern purchased and to the HUD Reg ulatory Ag r eement, but, in the absence of a fo reclosure, still require Sunny slope and its successors to o pera t e the property a s an affordable housing complex

. Thus, when F irst Southern purchased the loan, it did so with k

nowledg e of the restrictions, which likely had already “suppr e ssed” the value of the security interest F i rst Southern purchased: it boug ht an $8.5 million note for
approx imately

$5 million.

C.

The majority ’s two d irect a t t empts to avoid the conclusion required by R ash are also unpers u a s i v e

. F irst, the majorityI

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c o n c l udes that the reference to “use” in Rash means simpl y the “alternative to ‘ surrender’” rather than the “particular use to which the debtor elects to devote the property [ .] ” Maj. Op. 22. Thus, according to the majority

, Rash does not co m pel looking to Sunny slope’s p a r t i c ular use of the property a s afforda b l e housing

. Maj. O p. 22–24 & n.5. This is unpersuasive g iven the Sup r eme Court’s direction that the collateral must be valued from the debtor’s perspective a nd in lig ht of the “economic benefit for the debtor derived from the collateral.” Rash

, 5 20 U

. S

. at 963. A scertaining an

“ accurate [ ] g au g e of the debtor’s ‘use’ of the property ” requires determining present va l ue with reg a rd to how the debtor proposes to use the property —and any restrictions on the d ebtor’s u se of the property —rather than focusing simply

on the f a c t t h e debtor retains ownership. See id. (emphasis added). I ndeed, in Rash the Supreme Court r eferred to the debtor’s u se of the collateraliz ed truck not g enerally but specifically “to g enerate an income stream” “ in the f r e i g h thauling business.” Id. a t 957, 963.

E v e n if the majority were correct that a section 506 ( a ) valuation looks only to the fact of “ use,” its methodolog y still
contravenes the Supreme Court’s direction that replacement value should measure the cost to obtain sim i lar property

. Rash

, 520 U.S. at 955 (describing replacement v alue as “what the debtor would have to pay for c omparabl e property ”) (emphasis added); id. at 957 (“the price the R a s hes would have to pay to purchase a like vehicle”) (emphasis added); id.
at 960 (“the price a willing buy er in the debtor ’ s t r a d e , business, or situation would pay to obtain like property from

a willing seller” ) ( e m p h a sis added); id. at 965 (“the cost the debtor would incur to obtain a l i k e asset for the same ‘proposed . . . use’”) (emphasis added).I

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No willing buy er would purcha s e similar property for a price that does not reflect th e restrictive covenants because,

as discussed abo v e , those covenants burden how future buy ers could use the property

. The most obvious e vidence o f this is that F irst Southe r n p aid sig nificantly less for the complex than it would h ave if the property were not burdened by restrictive cove n a n t s. The majority is correct that the “cost to build or buy an a partment complex like Sunny slope would be much more than the valuation

. . . allow e d b y the district court,” Maj. O p. 2 3, only if such a complex were not, in fact, like the Sunny slope complex

, i.e.
, a 150-unit c omplex used to provide affordable housing a n d restricted to that use by covenants that run with the land. 2

Second, the majority b el ieves Rash should not a pply because using the replacement-value standard provides F irst Southern with only one-third the value it would o b t ain in a foreclosure sale. Thus, the majority co n c l u d e s, using the replacement-value standard here would disserve the policies motivating Rash —protecting the c r editor fr o m the “double risks” of a cramdown. Maj. Op. 24. A lthoug h the Supreme Court recog niz ed that f

oreclosur e v a l ue is “ty

pically lower” than replacement v alue, 520 U.S. at 960, it did not direct a different section 506(a) valuation in an aty pical situation. Rather, its metho d olog y is derived d irectly from the tex t o f the s t a t u t e : u sing f

oreclosure value (whether it be hig her o r

2 Fo r th is reaso n , th e an alo g y th e m aj o rity d raw s in f o o tn o te f i v e i s in ap t. Ev en if a seller w ere n o t ex p ected t o sell p ro p erty at a d isco u

n t b ased o n th e bu y er’ s in ten d ed u se, th e seller wo u ld b e ex p ec t e d t o a ccep t a d isco u n ted p u rch ase p rice w

h ere, as h ere, th e b u y er’ s u se o f th e p ro p erty is lim ited b y law

. T h e co rrect v alu atio n d o es n o t t u r n o n an y p articu lar
p ro j ected in co m e stream , bu t o n th e f act th at th e eco n o m i c b en ef it f ro m th e p ro p erty is lim i ted b y Su n n y slo pe’ s p ro p o sed u se an d th e restrictiv e

co v en an ts.I

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lower than replacement value) would render superfluous the
terms “disposition or use” and therefore is inappropriate. Id. at 962.

Moreover, F irst Southern an d the majority overstate the bank’s equities and need for protection. As noted above, F irst Sou t h e r n p urchased its loan from HUD at a d iscount price that presumably accounted for the risk of bankruptcy and the property ’s limitations, both of which a re ex pressly identified in the loan sale ag r eement. This disting u ishes the b ank from the “innocent” l ender F irst Southern hy pothesiz es in its opening brief, that e x tends a mortg ag e to a farmer w ho subsequently g rants a conservation e a sement over the land, depressing its value. F i r s t Southern purchased a lien on property worth less than its foreclosure value, for less than its foreclosure value; it cannot now be heard to complain that the bankruptcy court also valued it at less than foreclosure value.

* * *

The majority ig n o r es R ash ’s directive to value the collateral from the d ebtor’s pers p e c tive rather than from the creditor’s when the debtor elects to retain it. Unsurprising ly

, this erroneous “starti n g p oint” leads to an erroneous e nding point: a lthoug h the majority purports to use a “replacement
cost , ” Maj. Op. 24–25, in essence it uses a hy pothetical f o r e closure method o f valuation

— a s s i gn i n g t o t h e Sunny slope c omplex the same value that would obtain if F irst Southern f

oreclosed on the property a nd swept away the restrictive covenants. As a r esult, t he majority contravenes the Supreme Court, and in d o i n g s o a ll but assures a postcon f i r m ation default that will “ have the neg ative e ffect o fI

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eliminating the u s e of the Sunny slope project for affordable housing ,” Maj. Op. 26. I

respectfully

dissent. 3

3 A s a resu lt o f th e m aj o rity ’ s ru lin g , Su n n y slo p e’ s cro ss- ap p eal is m oo t

an d th e ap p eal an d cro ss- ap p eal in N o

. 13

- 1 6 1 4 are also m o o t. Un der th ese circu m stan ces, th ere i s n o n eed to ad d ress th e issu es raised in th ose sep arate ap peals.