FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

In the Matter of: SUNNYSLOPE

HOUSING LIMITED PARTNERSHIP,

Debtor,

FIRST SOUTHERN NATIONAL BANK,

Plaintiff-Appellant,

v.

SUNNYSLOPE HOUSING LIMITED

PARTNERSHIP,

Defendant-Appellee.

No. 12-17241

D.C. No.

2:11-cv-02579-

HRH

In the Matter of: SUNNYSLOPE

HOUSING LIMITED PARTNERSHIP,

Debtor,

SUNNYSLOPE HOUSING LIMITED

PARTNERSHIP,

Plaintiff-Appellant,

v.

FIRST SOUTHERN NATIONAL BANK,

Defendant-Appellee.

No. 12-17327

D.C. No.

2:11-cv-02579-

HRH
2 IN THE MATTER OF SUNNYSLOPE HOUSING

In the Matter of: SUNNYSLOPE

HOUSING LIMITED PARTNERSHIP,

Debtor,

FIRST SOUTHERN NATIONAL BANK,

Plaintiff-Appellant,

v.

SUNNYSLOPE HOUSING LP,

Defendant-Appellee.

No. 13-16164

D.C. No.

2:12-cv-02700-

HRH

In the Matter of: SUNNYSLOPE

HOUSING LIMITED PARTNERSHIP,

Debtor,

SUNNYSLOPE HOUSING LP,

Plaintiff-Appellant,

v.

FIRST SOUTHERN NATIONAL BANK,

Defendant-Appellee.

No. 13-16180

D.C. No.

2:12-cv-02700-

HRH

OPINION

Appeal from the United States District Court

for the District of Arizona

H. Russel Holland, Senior District Judge, Presiding
IN THE MATTER OF SUNNYSLOPE HOUSING 3

Argued and Submitted

May 12, 2015—San Francisco, California

Filed April 8, 2016

Before: Alex Kozinski, Richard A. Paez,

and Richard R. Clifton, Circuit Judges.

Opinion by Judge Clifton;

Dissent by Judge Paez

SUMMARY*

Bankruptcy

Reversing the district court’s judgment affirming the

bankruptcy court’s confirmation of a chapter 11 plan of

reorganization, the panel held that the plan was based on an

improper valuation of a creditor’s secured interest in real

property.

The debtor developed and operated an apartment complex

intended to provide affordable housing. When the debtor

defaulted on the senior loan for the project, the Department

of Housing and Urban Development honored its guarantee,

acquired the senior loan from the original private lender, and

resold it to First Southern National Bank. First Southern

started the foreclosure process, which would have wiped out

affordable housing restrictive covenants related to additional

* This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.
4 IN THE MATTER OF SUNNYSLOPE HOUSING

financing. The debtor then was put into bankruptcy, and it

exercised the cram down option of 11 U.S.C. § 1325(a)(5)(B)

and elected to retain the property in exchange for a new

payment plan that would require it to pay First Southern an

amount equal to the present value of the secured claim at the

time of bankruptcy. 

The panel held that the parties’ appeals were not equitably

moot even though funding for the reorganization plan had

been provided by the investment of new equity by

Cornerstone at Camelback, LLC, which had taken over

ownership of the debtor, and the plan had been substantially

consummated.

The panel held that the value of First Southern’s secured

interest under 11 U.S.C. § 506(a) should not be reduced by

the impact of the affordable housing restrictions because First

Southern was released from HUD’s requirements, and its

claim was superior to the rights of other secured creditors. 

All of the restrictive covenants that the debtor sought to

invoke were derived from positions that were junior and

expressly subordinated to First Southern’s interest. 

Distinguishing Assocs. Commercial Corp. v. Rash, 520 U.S.

953 (1997), the panel held that the plan of reorganization

confirmed by the bankruptcy court must be set aside because

valuing First Southern’s secured interest as if the affordable

housing restrictions related to subordinated positions still

applied was not appropriate under § 506(a). The panel

reversed the district court’s judgment and remanded the case

for additional proceedings.

Dissenting, Judge Paez wrote that under Rash, First

Southern’s collateral, the apartment complex, must be valued

in light of the debtor’s proposed use of the property as
IN THE MATTER OF SUNNYSLOPE HOUSING 5

affordable housing. Accordingly, Judge Paez did not agree

with the majority that the bankruptcy court erred in its

valuation of First Southern’s collateral under § 506(a).

COUNSEL

Brian Sirower (argued) and Walter J. Ashbrook, Quarles &

Brady LLP, Phoenix, Arizona; E. King Poor, Quarles &

Brady LLP, Chicago, Illinois, for Plaintiff-Appellant/CrossAppellee First Southern National Bank.

David William Engelman, Scott B. Cohen, and Bradley D.

Pack, Engelman Berger, P.C., Phoenix, Arizona; Susan M.

Freeman (argued), Henk Taylor, and Justin Henderson, Lewis

Roca Rothgerber Christie LLP, Phoenix, Arizona for Debtor

Defendant-Appellee/Cross-Appellant Sunnyslope Housing

Limited Partnership.
6 IN THE MATTER OF SUNNYSLOPE HOUSING

OPINION

CLIFTON, Circuit Judge:

This case concerns the valuation of the secured interest in

real property under section 506(a) of the Bankruptcy Code

when a bankrupt debtor has exercised the “cram down”

option provided under section 1325(a)(5)(B) of the Code.

Debtor Sunnyslope Housing Limited Partnership

(“Sunnyslope”) developed and operated an apartment

complex in Phoenix intended to provide affordable housing.

The project was largely financed by government agencies,

and restrictions were imposed to require that the apartments

would be used for affordable housing. The senior loan was

provided by a private entity but was guaranteed by the

Department of Housing and Urban Development (“HUD”).

Other loans were provided by the City of Phoenix and the

State of Arizona, and additional financial support was

available through 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 guaranteed loan. Sunnyslope

defaulted. HUD honored its guarantee, acquired the senior

loan from the original private lender, and resold it to First

Southern National Bank (“First Southern”). First Southern

started the foreclosure process, which would have the effect

of wiping out all the affordable housing restrictions related to

the additional financing. Before foreclosure was

accomplished, however, Sunnyslopewas put into bankruptcy.

As the debtor, Sunnyslope exercised the cram down

option and elected to retain the property. It argued that the

value of First Southern’s secured interest should be calculated
IN THE MATTER OF SUNNYSLOPE HOUSING 7

with the affordable housing restrictions remaining in place.

The bankruptcy court and the district court both agreed, and

a plan of reorganization was confirmed and implemented.

The plan valued First Southern’s secured interest at $3.9

million, substantially less than what it would cost to replace

the property or the amount that First Southern could have

obtained if it had been permitted to foreclose on the property.

First Southern appeals. The primary question is whether

the value of First Southern’s secured interest should be

reduced by the impact of the affordable housing restrictions.

We conclude that it should not be reduced in that manner. We

reverse the judgment of the district court and remand for

further proceedings.

I. Background

Sunnyslope is an Arizona limited partnership. The project

it developed and operated consisted of 150 apartments.

Financing came from several sources.

The primary financing was provided by an $8.5 million

loan from Capstone Advisors, LLC (the “Capstone Loan”).

The federal government, through HUD, guaranteed the

Capstone Loan. The terms of the loan provided for

repayment over 40 years with an interest rate of 5.35% per

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

on the property. To obtain the HUD guaranteed loan,

Sunnyslope had to enter into and record a Regulatory

Agreement that required that the project be operated as

affordable housing and that limited rents that tenants could be

charged to amounts within levels set by HUD.
8 IN THE MATTER OF SUNNYSLOPE HOUSING

The Capstone Loan was funded by the sale of municipal

bonds issued by the Phoenix Industrial Development

Authority (“IDA”). The Phoenix IDA required the recording

of another agreement that compelled the owner of the

apartment project to operate it in accordance with the

affordable housing requirements of 26 U.S.C. § 142(d). The

IDA Regulatory Agreement provided that the 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.” It further provided that “[t]his Agreement,

and each and all of the terms hereof, shall terminate and be of

no further force and effect in the event of a foreclosure of the

lien of the Mortgage 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 by a second-position

deed of trust. To obtain that loan, Sunnyslope had to enter

into recorded covenants that required the debtor to set aside

twenty-three units of the project as affordable housing. The

covenants provided that they were binding on successor

owners but also that “the provisions hereof are expressly

subordinate to the HUD insured mortgage or Deed of Trust,

to the HUD Regulatory Agreement, and subordinate to all

applicable HUD mortgage insurance . . . regulations and

related administrative requirements.” They further provided

that “[i]n the event of foreclosure or transfer of title by deed

in lieu of foreclosure, any and all land use covenants

contained herein shall automatically terminate.”

Another $500,000 in public funding came from the State

of Arizona, secured by a third-position deed of trust. It was

conditioned on the recording of covenants that set aside an

additional five units for low-income renters. Like the City’s
IN THE MATTER OF SUNNYSLOPE HOUSING 9

provisions, the State covenants were binding upon the owner

and any successors to the property, but they similarly

provided that “[t]he provisions of this Agreement are

expressly subordinate to the Senior Loan, to the HUD

Regulatory Agreement, and subordinate to all applicable

HUD mortgage insurance . . . regulations and related

administrative requirements.” They also provided that “[i]n

the event of foreclosure or transfer by title of deed in lieu of

foreclosure, any and all land use covenants contained in this

agreement shall automatically terminate.”

Once the apartment project was completed in 2008,

Sunnyslope and its equity owners qualified for federal tax

credits under the Low Income Housing Tax Credit

(“LIHTC”) program. The LIHTC program gives investors a

monetary incentive to invest in low income housing by

providing tax credits rather than traditional cash returns.

Those tax credits are made available for the first ten years a

project operates as affordable housing. The Sunnyslope

apartment project was placed in service in 2008, so there

were seven years of tax credits remaining at the time of the

bankruptcy proceedings described below, estimated to be

worth $539,973 per year. To receive the tax credits,

Sunnyslope entered into still another agreement, requiring

that all 150 units in the project meet the definition of “low

income units” in 26 U.S.C. § 42(i)(3)(A). Like the financing

agreements described above, this agreement was binding on

future owners but the provisions of the agreement “are

expressly subordinate to the HUD insured mortgage or Deed

of Trust, to the HUD Regulatory Agreement, and subordinate

to all applicable HUD mortgage insurance . . . regulations and

related administrative requirements.” The agreement further

provided that “[i]n the event of foreclosure or transfer of title
10 IN THE MATTER OF SUNNYSLOPE HOUSING

by deed in lieu of foreclosure, any and all land use covenants

contained herein shall automatically terminate.”

Unfortunately, the project was not blessed with good

timing. It was completed in 2008, the same year that the

nation suffered a financial crisis, driven in large part by the

bursting of a housing bubble. Housing prices in much of the

nation declined substantially, and Phoenix was one of the

cities hit hardest. Whether or not that was the cause of

distress for this project,1by the summer of 2009 Sunnyslope

defaulted on the Capstone Loan. HUD took the loan over

from Capstone.

In September 2010, HUD sold a package of loans to First

Southern. The Capstone Loan was part of the package, and it

was sold to First Southern for $5,050,186.24. The loan sale

agreement provided that the deed of trust was a valid and

enforceable lien on the property, subject to “any applicable

bankruptcy, insolvency, reorganization and other laws

affecting creditors’ rights generally” and except for

“covenants, conditions and restrictions, rights of way,

easements and other matters of public record[.]” As part of

the sale, HUD released the HUD Regulatory Agreement.

First Southern, in October 2010, filed a foreclosure

complaint against Sunnyslope in state court and moved for

the appointment of a receiver. A trustee’s sale of the project

was noticed. The receiver negotiated an agreement to sell the

property, post-foreclosure, for $7,650,000. Before any sale

could be completed, however, Sunnyslope’s general partner

filed a petition for involuntary bankruptcy on January 31,

1

In its brief, Sunnyslope points to “a substantial increase in construction

costs and other challenges.”
IN THE MATTER OF SUNNYSLOPE HOUSING 11

2011. The bankruptcy court later entered an order converting

the involuntary bankruptcy to a voluntary Chapter 11

bankruptcy.

Through the bankruptcy proceedings, Sunnyslope sought

to retain ownership and control of the property by exercising

the so-called “cram down” power under 11 U.S.C.

§ 1325(a)(5)(B). That power allowed the debtor, Sunnyslope,

to keep the property over the objection of the secured

creditor, First Southern, in exchange for a new payment plan

that would require Sunnyslope to pay First Southern an

amount equal to the present value of the secured claim at the

time of bankruptcy. The value of the allowed secured claim

is governed by 11 U.S.C. § 506(a). See Associates

Commercial Corp. v. Rash, 520 U.S. 953, 957 (1997). The

determination of that value is the primary subject of this

appeal.

In its proposed plan of reorganization, Sunnyslope

originally asserted that First Southern’s secured claim should

be valued at $2.5 million. First Southern filed a motion under

section 506(a) to determine the amount of its secured claim.

First Southern’s experts valued the property at about $7.7

million. That value was premised on the release of the

affordable housing covenants, because foreclosure would

extinguish them. In response, Sunnyslope’s expert valued the

property without the affordable housing restrictions at $7

million but valued it at $2.6 million if the restrictions still

applied. The valuation bySunnyslope’s expert did not include

anything for the value of the tax credits. In reply, First

Southern offered an additional report from one of its experts

opining that with the rent restrictions the property was worth

$4.885 million and that the tax credits that could be available
12 IN THE MATTER OF SUNNYSLOPE HOUSING

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 affordable housing covenants remained in effect

to limit the rent that could be collected from the apartments.

Sunnyslope argued that they still applied and, as a result, the

limit on the amount of rental income that could be realized

from the apartments substantially reduced the value of the

project. First Southern contended that the restrictions should

no longer apply and that the project should be valued

accordingly.

The bankruptcy court agreed with Sunnyslope. It

concluded that the secured value of the property was $2.6

million, based on continuing application of the covenants, and

further concluded that the creditor had no right to the value of

the tax credits. The bankruptcy court subsequently confirmed

Sunnyslope’s plan of reorganization and denied First

Southern’s motion for a stay of the plan.

That reorganization plan proposed to pay $2.6 million for

First Southern’s secured claim over 40 years at an interest

rate of 4.4 % per annum. The balance of First Southern’s

claim would be paid as a balloon payment at the end of the

40-year term. Funding for the plan was to be provided by the

investment of $1.2 million of new equity by Cornerstone at

Camelback, LLC (“Cornerstone”), which would take over

ownership of Sunnyslope, and from revenues generated by

continued operation of the apartment complex as affordable

housing.

First Southern appealed to the district court, challenging

both the valuation order and the confirmation order. The
IN THE MATTER OF SUNNYSLOPE HOUSING 13

district court ultimately held, in an order entered September

18, 2012, that the valuation was properly limited by the

affordable housing restrictions, but that the valuation should

have included the value of the tax credits. The matter was

remanded to the bankruptcy court for further proceedings.

The district court also concluded that the bankruptcy court

did not err in denying First Southern’s motion for a stay.

First Southern filed a notice of appeal to this court on

October 9, 2012, primarily contesting the section 506(a)

valuation. Sunnyslope responded by filing a notice of crossappeal, contesting the inclusion of the tax credits in the

section 506(a) valuation. The clerk of this court issued an

order requiring the parties to brief whether this court had

jurisdiction over the appeal and cross-appeal, as there was no

final order from the district court.

After additional proceedings, the bankruptcy court

entered a memorandum decision on December 12, 2012,

determining that the value of the tax credits was $1.3 million,

bringing the secured value of First Southern’s lien to $3.9

million. The bankruptcy court subsequently confirmed a

modified plan of reorganization based on that valuation. First

Southern appealed to the district court and sought a stay. The

district court affirmed the bankruptcy court’s determinations

and declined to grant First Southern a stay. The

reorganization plan was thereafter put into effect;

Cornerstone provided its new equity funding and took control

of Sunnyslope.

First Southern filed a second notice of appeal to this court

on June 6, 2013. Sunnyslope again cross-appealed.

Sunnyslope moved to dismiss both appeals on the ground of

equitable mootness.
14 IN THE MATTER OF SUNNYSLOPE HOUSING

II. Jurisdiction

Although there may have been some question as to this

court’s jurisdiction following the filing of the first notice of

appeal,2the district court’s later entry of final judgment has

eliminated that question. “[T]he rule in this circuit [is] that

once a final judgment is entered, an appeal from an order that

otherwise would have been interlocutory is then appealable.”

In re Rains, 428 F.3d 893, 901 (9th Cir. 2005) (quoting In re

Eastport Assocs., 935 F.2d 1071, 1075 (9th Cir. 1991)).

“Whatever prematurity existed in [an appeal from an

interlocutory order] was cured by the subsequent entry of a

final judgment.” Id. Thus, we have jurisdiction over the issues

in both appeals, and we now consider both appeals together.

III. Equitable Mootness

Sunnyslope has moved to dismiss these appeals as

equitably moot. “An appeal is equitably moot if the case

presents ‘transactions that are so complex or difficult to

unwind’ that ‘debtors, creditors, and third parties are entitled

to rely on [the] final bankruptcy court order.’” In re

Mortgages Ltd., 771 F.3d 1211, 1215 (9th Cir. 2014) (quoting

In re Thorpe Insulation Co., 677 F.3d 869, 880 (9th Cir.

2

“Under 28 U.S.C. § 158(a), we have jurisdiction to hear appeals from

final judgments, order[s] and decrees entered by a district court on appeal

from a bankruptcy court.” In re Fowler, 394 F.3d 1208, 1211 (9th Cir.

2005) (internal quotation marks omitted). This court may also hear

interlocutory appeals based on the flexible finality rule, a judicially

created rule unique to bankruptcy. See id. (discussing the flexible finality

rule). The parties have disagreed about the applicability of that flexible

finality rule in these circumstances, but it is no longer necessary for us to

resolve that issue.
IN THE MATTER OF SUNNYSLOPE HOUSING 15

2012)); see also In re Transwest Resort Properties, Inc.,

801 F.3d 1161, 1168–73 (9th Cir. 2015).3

Sunnyslope primarily points to the new equity invested by

Cornerstone as the reason to dismiss the appeals as moot.

Because the investment was made as part of a 26 U.S.C.

§ 1033 exchange, it contends that Cornerstone and its

principals would be subject to tax liabilities of more than $1.5

million including penalties and interest if the plan

confirmation order were reversed. It also argues that

Cornerstone would be unable to recover a substantial part of

the $1.2 million that it invested in Sunnyslope if the plan

were unwound.

This court has identified four factors to help determine

whether a case should be deemed equitably moot:

(1) “whether a staywas sought, for absent that

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

a stay was sought and not gained, [the court]

then will look to whether substantial

consummation of the plan has occurred”;

(3) “[the court] will look to the effect that a

remedy may have on third parties not before

the court”; (4) “[f]inally, we will look at

whether the bankruptcy court can fashion

3

 The doctrine of equitable mootness differs from Article III mootness.

The latter deals with whether there is an actual, live case or controversy

for a court to decide. If there is not, then we lack authority under the

Constitution to proceed. In contrast, “equitable mootness” is “a judgemade abstention doctrine” that is based on an unwillingness to alter the

outcome of a plan of reorganization in circumstances where it would not

be equitable to do so. In re Mortgages, 771 F.3d at 1214–15. As it is a

prudential doctrine, it does not present a challenge to our jurisdiction.
16 IN THE MATTER OF SUNNYSLOPE HOUSING

effective and equitable relief without

completely knocking the props out from under

the plan and thereby creating an

uncontrollable situation before the bankruptcy

court.”

Id. at 1217 (quoting In re Thorpe Insulation, 677 F.3d at

881).

Generally, in determining equitable mootness, and in

particular with regard to the fourth factor in the analysis, the

power to grant equitable relief, we have noted that “[t]he

party asserting mootness has a heavy burden to establish that

there is no effective relief remaining for a court to provide.”

In re Focus Media, Inc., 378 F.3d 916, 923 (9th Cir. 2004)

(quoting In re Pintlar Corp., 124 F.3d 1310, 1312 (9th Cir.

1997)). We conclude that Sunnyslope has not carried that

burden.

First Southern applied for a stay in the bankruptcy court

and then again in the district court. Those applications were

denied. First Southern did not appeal the denial of the stay to

this court, asserting that it was misled by Sunnyslope as to the

need to do so, but it did file two separate notices of appeal.

These made plain its intent to pursue the matter on appeal.

We conclude that the failure to seek a stay from this court is

not fatal to the current appeal and that First Southern’s efforts

to obtain a stay from the bankruptcy court and the district

court were sufficient to satisfy the first factor. We have

previously declined to dismiss appeals based on equitable

mootness when, as here, the aggrieved party applied for a stay

to the bankruptcy court and appealed to the district court but

did not further pursue a stay motion to this court. See In re

Focus Media, 378 F.3d at 924; In re Mortgages, 771 F.3d at
IN THE MATTER OF SUNNYSLOPE HOUSING 17

1216; In re Transwest, 801 F.3d at 1168. The reality is that

this court does not often grant stays in circumstances like

these. A secured creditor might be wise to err on the side of

caution and seek a stay from this court, but the failure to do

so in this case should not, we conclude, mean that these

appeals should be dismissed as moot.4

As for the second factor, the plan as approved by the

bankruptcy court was substantially consummated, as all

parties acknowledge. Cornerstone invested the new equity

funding and took over Sunnyslope.

The question posed by the third factor is “whether

modification of the plan of reorganization would bear unduly

on the innocent.” In re Thorpe Insulation, 677 F.3d at 882;

see In re Transwest, 801 F.3d at 1169. In our view, the

unraveling of the plan would not have a negative effect on

parties intended to be protected by the doctrine of equitable

mootness, namely innocent third parties not before the court.

The key third party who would be affected by the

unraveling of the plan is the new equity investor under the

plan, Cornerstone. While not a party before the court in its

own name, it is here in the guise of Sunnyslope. Sunnyslope

concedes that Cornerstone is now the equity owner of

Sunnyslope. More broadly, Cornerstone is not the kind of

4 Sunnyslope contends that the aggrieved party is required to appeal a

denial of a stay to this court and thereafter to the Circuit Justice, citing In

re Roberts Farms, 652 F.2d 793, 798 (9th Cir. 1981). But our later

decision in Focus Media looked only to see if the party sought a stay from

the bankruptcy court and the district court. In Roberts Farms, the party did

not even seek a stay from the bankruptcy court, so the question of what

further steps beyond that had to be taken was not before the court.

652 F.2d at 798.
18 IN THE MATTER OF SUNNYSLOPE HOUSING

innocent third party the doctrine of equitable mootness is

intended to protect.Cornerstone’s principals are sophisticated

investors. They decided on their own to obtain funds for this

investment via an exchange transaction that posed potential

tax risks if something went wrong. Cornerstone was

intimately involved in the development of the plan under

which they took over Sunnyslope. It knew that the valuation

upon which the plan was based was vigorously disputed by

First Southern. Cornerstone’s primary principal, Mr.

Aronson, served as one of Sunnyslope’s main witnesses.

Cornerstone knew that First Southern had filed notices of

appeal. The failure of First Southern to seek a stay from this

court could not have given Cornerstone reasonable cause to

conclude that First Southern had abandoned its challenge.

Cornerstone made a conscious decision to proceed

nonetheless. The attempt to characterize Cornerstone as an

innocent third party to invoke dismissal of the appeal on the

ground of equitable mootness is unconvincing.

Sunnyslope argues that the City of Phoenix and the State

of Arizona were also innocent third parties that would be

harmed by the unraveling of the plan. But no additional

investment was made under the plan by either the City or the

State. Nor, as junior secured creditors, are they third parties

absent from the proceedings, unable to protect themselves.

They have legitimate interests as creditors and as sponsors of

affordable housing, but those interests do not support

dismissal of the appeal on the ground of equitable mootness.

The fourth factor, whether the bankruptcy court can

fashion effective and equitable relief, is generally the most

important of the four factors. In re Thorpe Insulation, 677

F.3d at 883. But Sunnyslope’s objection here is not really that

the transactions cannot practically be unwound. The
IN THE MATTER OF SUNNYSLOPE HOUSING 19

transactions were not that complex. The argument, rather, is

that the unwinding would have a substantial negative impact

on Cornerstone. That may be true, but as discussed above,

Cornerstone is not the kind of innocent third party the

doctrine of equitable mootness is designed to protect.

We deny Sunnyslope’s motion to dismiss the appeals as

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

standard of review applied by the district court. In re AFI

Holding, Inc., 525 F.3d 700, 702 (9th Cir. 2008). No

deference is owed to the district court’s decision. Id. “The

bankruptcy court’s findings of fact are reviewed for clear

error, while its conclusions of law are reviewed de novo.” In

re JTS Corp., 617 F.3d 1102, 1109 (9th Cir. 2010) (internal

quotation marks omitted). This court will “accept the

bankruptcy court’s findings of fact, unless the court is left

with the definite and firm conviction that a mistake has been

committed.” Id. (citation and quotation marks omitted).

The primaryquestion posed here is whether the affordable

housing restrictive covenants should affect the valuation of

First Southern’s secured claim under section 506(a). The facts

related to that issue are not seriously in dispute. As noted

above, Sunnyslope’s own expert, while valuing the secured

claim as worth $2.6 million if the covenants still applied,

conceded that the value was $7 million if they did not. We

conclude, as a matter of law, that the restrictive provisions

should not apply to limit the value of First Southern’s secured

claim.
20 IN THE MATTER OF SUNNYSLOPE HOUSING

The starting point is that First Southern as a secured

creditor stands in the first position. It obtained the rights of

the senior lender from HUD. HUD acquired the Capstone

Loan after it fell into default, sold it to First Southern, and

released First Southern from the requirements of the HUD

Regulatory Agreement. First Southern’s secured claim is

superior to the rights of other secured creditors.

All of the restrictive covenants and other provisions that

Sunnyslope seeks to invoke to limit the project to affordable

housing and to the reduced rental income that would be

collected as a result are derived from positions that were

junior and expressly subordinated to the Capstone Loan. The

agreement related to the City of Phoenix loan, for instance,

states that “the provisions hereof are expressly subordinate to

the HUD insured mortgage or Deed of Trust, to the HUD

Regulatory Agreement, and subordinate to all applicable

HUD mortgage insurance . . . regulations and related

administrative requirements.” Theyfurther provided that “[i]n

the event of foreclosure or transfer of title by deed in lieu of

foreclosure, any and all land use covenants contained herein

shall automatically terminate.” If there were a foreclosure

sale, there is no doubt that the restrictive provisions would be

swept away, giving First Southern’s interest a value of at least

$7 million.

Due to the bankruptcy proceedings, there has not been a

foreclosure sale. But that does not mean that the secured

value of First Southern’s secured claim may be suppressed by

conditions subordinated to its position and attached to loans

made by junior creditors.

Section 506 of the Bankruptcy Code provides for the

recognition in bankruptcy of the claim of a secured creditor:
IN THE MATTER OF SUNNYSLOPE HOUSING 21

An allowed claim of a creditor secured by a

lien on property in which the estate has an

interest . . . is a secured claim to the extent of

the value of such creditor’s interest in the

estate’s interest in such property, . . . and is an

unsecured claim to the extent that the value of

such creditor’s interest . . . is less than the

amount of such allowed claim. Such value

shall be determined in light of the purpose of

the valuation and of the proposed disposition

or use of such property, and in conjunction

with any hearing on such disposition or use or

on a plan affecting such creditor’s interest.

11 U.S.C. § 506(a)(1).

In Associates Commercial Corp. v. Rash, 520 U.S. 953

(1997), the Supreme Court applied this section in the context

of a bankruptcy cram down. Rash purchased a tractor truck

for use in his freight hauling business. He made a down

payment, agreed to pay the remaining amount in 60 monthly

installments, and pledged the truck as collateral. The seller

assigned the loan and the truck lien to a third party, ACC.

Rash and his wife later filed for bankruptcy. At that time the

balance owed to ACC on the truck loan was $41,171. Id. at

956. The debtor exercised the cram down power under

section 1325(a)(5)(B), which allows a debtor to retain the

property over the objection of a secured creditor. Id. at 957.

The dispute there, as here, concerned the valuation of the

creditor’s secured claim. The creditor argued that the proper

valuation was “the price the Rashes would have to pay to

purchase a like vehicle,” id., estimated to be $41,000. The

debtor, in contrast, argued that the proper valuation was “the
22 IN THE MATTER OF SUNNYSLOPE HOUSING

net amount ACC would realize upon foreclosure and sale of

the collateral,” id., estimated to be $31,875. The bankruptcy

court and the district court agreed with the debtor, and so did

the Fifth Circuit sitting en banc, but the Supreme Court did

not. The Court held that replacement value was the proper

measure in that case.

The Court highlighted a portion of the second sentence of

section 506(a) in determining the value of the secured portion

of the claim: “Such value shall be determined in light of the

purpose of the valuation and of the proposed disposition or

use of such property.” Id. at 961. It treated the phrase

“proposed disposition or use” of the collateral as identifying

two alternatives: “in one case the collateral will be

surrendered to the creditor, and in the other, the collateral will

be retained and used by the debtor.” Id. at 962. The Court

concluded that a “replacement-value” standard “distinguishes

retention from surrender and renders meaningful the key

words ‘disposition or use.’” Id.

In the Rash case, as here, the debtor elected to retain the

property and use it in his business, over the objection of the

secured creditor. Sunnyslope thus argues that Rash requires

the rejection of the “foreclosure value” and the application of

“replacement value” here, which it defines as the value of the

property when used for affordable housing. That inference

goes astray in two separate ways.

For one, it takes the reference to “use” in Rash and in

section 506(a) as meaning the particular use to which the

debtor elects to devote the property, in Sunnyslope’s case as

affordable housing. But Rash interpreted “use” simply to

mean the alternative to “surrender.” Rash decided to retain

the truck rather than give it up. Nothing in the Court’s
IN THE MATTER OF SUNNYSLOPE HOUSING 23

decision supports the proposition that the “replacement

value” of the property should be measured by the income that

can be generated when used in the specific way that the

debtor elects to use it. There was no discussion in Rash of the

income stream that Rash might realize from using the truck

in his freight hauling business. Instead, replacement value

was variously described as “what the debtor would have to

pay for comparable property,” id. at 955, or “the price the

Rashes would have to pay to purchase a like vehicle,” id. at

957, or “the price a willing buyer in the debtor’s trade,

business, or situation would pay to obtain like property from

a willing seller,” id. at 960. The cost to build or buy an

apartment complex like Sunnyslope would be much more

than the valuation of First Southern’s secured claim asserted

by Sunnyslope and allowed by the district court.

For another, Sunnyslope fails to appreciate how the facts

of this case diverge from the facts in Rash. In that case, the

“replacement value” was higher than the “foreclosure value.”

That is usually the case. As Rash expressly recognized, the

foreclosure value is “typically lower.” Id. at 960. In our case,

however, the foreclosure value is acknowledged to be at least

$7 million, because a foreclosure would eliminate the

affordable housing restrictions, while the “fair market value”

based on an income stream method of valuation that accounts

for the affordable housing restrictions is substantially less.

Disregarding “foreclosure value” in favor of an income

stream valuation based on the authority of Rash ignores what

the Court said about the reason for using the replacement

value instead:

When a debtor surrenders the property, a

creditor obtains it immediately, and is free to
24 IN THE MATTER OF SUNNYSLOPE HOUSING

sell it and reinvest the proceeds. . . . If a

debtor keeps the property and continues to use

it, the creditor obtains at once neither the

property nor its value and is exposed to

double risks: The debtor may again default

and the property may deteriorate from

extended use. Adjustments in the interest rate

and secured creditor demands for more

“adequate protection,” 11 U.S.C. § 361, do

not fully offset these risks.

Id. at 962–63. Applying the replacement value

standard—establishing a value higher than the foreclosure

value—was deemed by the Court to be more appropriate in

light of the double risks that must be borne by the creditor.

Sunnyslope’s proposed income stream valuation does not

account for the double risks. To the contrary, it imposes them

on the creditor at the same time that it provides the creditor

with a value about one-third of what the creditor could obtain

if the property were surrendered.

Rash does not support assigning a value to First

Southern’s secured interest based on a method of valuation

that is substantially lower than the replacement cost of the

property. The replacement cost of a like property is the

standard that Rash commands, and the standard that should

have been applied.5

5 The dissent argues, at 37–39, that our opinion fails to determine value

with regard to the fact that Sunnyslope proposes to use the property as an

affordable housing complex. But Rash does not authorize the bankruptcy

valuation to be based on the income stream that would be derived fromthe

use of property as an affordable housing complex. It holds that “the

replacement-value standard accurately gauges the debtor’s ‘use’ of the

property.” 520 U.S. at 963. Replacement value is a measure of what it
IN THE MATTER OF SUNNYSLOPE HOUSING 25

Under section 1325(a)(5) of the Code, a plan’s treatment

of a secured claim can be confirmed if one of three conditions

is satisfied: the creditor accepts the plan, the debtor

surrenders the property, or the debtor invokes the cram down

power. Rash, 520 U.S. at 957. That cram down option permits

confirmation of a plan under which the debtor will retain

property subject to the creditor’s security interest over the

objection of the creditor—the plan is “crammed down the

throat[] of [an] objecting creditor[ ].” Kham & Nate’s Shoes

No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351, 1359 (7th

Cir. 1990). But that option does not authorize shortchanging

the creditor with regard to its current secured value. The

statute protects the creditor to the extent of that secured value.

Rash, 520 U.S. at 957. It does not authorize a substantial

reduction in the amount of the secured value simply because

the bankruptcy process itself means that the creditor cannot

actually foreclose on the property.

In this instance, First Southern does not have a secured

claim in the full face amount of the note, $8.5 million,

because the property was not worth that much at the time of

the bankruptcy valuation. First Southern does not contend

would cost to produce or acquire an equivalent piece of property, in that

instance “the price the Rashes would have to pay to purchase a like

tractor.” Id. at 957. The seller of the tractor would not be expected to sell

it to the Rashes cheaper because the Rashes planned to use it in a way that

would not generate much income. Just as the replacement value of a

tractor would not take into account the buyer’s anticipated use of the

tractor, the replacement value of a 150-unit apartment complex does not

take into account the fact that there is a restriction on the use of the

complex. Thus, contrary to the dissent’s assertion, at 40, that we are using

a foreclosure method of valuation, we merely conclude that it was

erroneous to factor the restrictive covenants into the replacement value of

Sunnyslope.
26 IN THE MATTER OF SUNNYSLOPE HOUSING

that its secured claim should be valued that highly, but even

if it did, its claim would properly be rejected and it could be

forced to accept the reduced present value of its secured

claim. But the Bankruptcy Code does not authorize the

further reduction in First Southern’s secured value asserted by

Sunnyslope. The “cram down” does not go that far.

Sunnyslope argues that valuing First Southern’s secured

interest without regard to the affordable housing restrictions

will have the negative effect of eliminating the use of the

Sunnyslope project for affordable housing. That is likely true,

and it is, in an immediate sense, unfortunate. But from a

broader perspective, failure to recognize the priority of a

senior secured creditor would discourage lenders from

making the loans in the first place or would make those loans

much more expensive. Future prospective lenders would have

to factor in the risk that the value of their secured interest

would be substantially diminished. It would, in addition,

surely make it much more difficult for HUD to sell defaulted

loans on the secondary market and would drastically reduce

the amount that HUD could obtain from reselling those loans.

Consider what a buyer would pay for HUD’s loan to

Sunnyslope if it were known that the affordable housing

restrictions would remain in place. HUD would either be

saddled with more underperforming loans that it could not

sell or would salvage substantially less money from defaulted

loans, leaving it with substantially less money for future

projects.

HUD could have designed the financing in the way that

Sunnyslope advocates, by conditioning the sale of the

Capstone Loan to First Southern on continued application of

the Regulatory Agreement. Instead, it expressly released that

agreement. Similarly, the Capstone Loan could have been
IN THE MATTER OF SUNNYSLOPE HOUSING 27

made subject to the various affordable housing covenants and

restrictions related to the Phoenix IDA financing, the City

loan, the State loan, and the tax credits, but that is not how the

deal was put together. Those provisions were explicitly

subordinated to the Capstone Loan. We cannot disregard the

terms of the agreements.

Sunnyslope also complains that First Southern should not

benefit from knowingly undertaking what Sunnyslope

describes as a “high risk/high reward” transaction, a point

echoed in the dissenting opinion, at 37. But the same

description could be applied to Sunnyslope’s new owners. It

is not persuasive for the pot to call the kettle black. There is

no reason whyCornerstone should be uniquely immune from

the risks that it knowingly undertook.

More importantly, the argument fails to appreciate that

First Southern stands in the shoes of the original lender,

Capstone or, in practical terms, HUD. Suppose HUD (or

Capstone) still owned the loan. As the senior lender, its rights

would seem clearly established, and Sunnyslope’s argument

that the secured value of HUD’s position should be reduced

because of the affordable housing restrictions, based on junior

financing expressly subordinated to HUD’s position, would

lack force. HUD’s position was fully conveyed to First

Southern; there is no claim that HUD held anything back for

itself. Similarly, there is no claim that First Southern was not

a bona fide purchaser of HUD’s interest, so there is no basis

to treat First Southern as having an interest less than the

interest HUD would have.
28 IN THE MATTER OF SUNNYSLOPE HOUSING

The value assigned by the bankruptcy court to First

Southern’s secured interest did not accurately reflect the

actual value of that interest.6

V. Conclusion

Valuing First Southern’s secured interest as if the

affordable housing restrictions related to subordinated

positions still applied was not appropriate under section

506(a). As a result, the plan of reorganization confirmed by

the bankruptcy court and affirmed by the district court must

be set aside. It was based on an improper valuation of First

Southern’s interest. We reverse the judgment of the district

court and remand for additional proceedings consistent with

this opinion.

REVERSED and REMANDED.

PAEZ, Circuit Judge, dissenting:

I do not agree with the majority that the bankruptcy court

erred in its valuation of First Southern’s collateral under 11

U.S.C. § 506(a). In my view, a straightforward application of

the Supreme Court’s decision in Associates Commercial

Corporation v. Rash, 520 U.S. 953 (1997), compels valuing

First Southern’s collateral—a 150-unit apartment complex—

in light of Sunnyslope’s proposed use of the property in its

6

In light of our resolution of this issue, it is not necessary for us to

consider other arguments made by the parties, including treatment of the

tax credits and the appropriate interest rate on payments owed to First

Southern under the plan.
IN THE MATTER OF SUNNYSLOPE HOUSING 29

plan of reorganization as affordable housing. I therefore

respectfully dissent from the majority’s holding that

Sunnyslope’s proposed use of the property and the attendant

restrictive covenants should not affect the value of First

Southern’s secured claim.1

In reversing the bankruptcy court’s valuation ruling, the

majority errs in several major respects, which all relate to its

misapplication of the Supreme Court’s decision in Rash, the

key case in this appeal. Therefore, I begin with a discussion

of Rash and two lower-court opinions helpful in

understanding its holding. Ithen address the errors that result

from the majority’s misapplication of Rash. In the end, I

would affirm the bankruptcy court’s order valuing First

Southern’s collateral at $3.9 million.

I.

As the majority makes clear, First Southern’s secured

claim must be valued according to section 506(a), which

provides:

An allowed claim of a creditor secured by a

lien on property in which the estate has an

interest . . . is a secured claim to the extent of

the value of such creditor’s interest in the

estate’s interest in such property, . . . and is an

unsecured claim to the extent that the value of

such creditor’s interest . . . is less than the

amount of such allowed claim. Such value

 

1

I agree with the majority that First Southern’s appeal is not equitably

moot. See In re Transwest Resort Properties, Inc., 801 F.3d 1161, 1168

(9th Cir. 2015).
30 IN THE MATTER OF SUNNYSLOPE HOUSING

shall be determined in light of the purpose of

the valuation and of the proposed disposition

or use of such property, and in conjunction

with any hearing on such disposition or use or

on a plan affecting such creditor’s interest.

11 U.S.C. § 506(a)(1).

A proper understanding of the Supreme Court’s

interpretation of section 506(a) in Rash, and the majority’s

erroneous application, begins with our decision in In re Taffi,

96 F.3d 1190 (9th Cir. 1996) (en banc). In Taffi, the IRS had

attached a lien to the Taffis’ house to secure payment for a

tax liability. Id. at 1191. The parties disputed the value of

the IRS’s secured interest in the house. The Taffis advocated

for a foreclosure value—that is, the amount the house would

sell for under forced sale conditions. The IRS argued that the

claim was worth whatever a willing and informed buyer

would pay for the house under market conditions—what this

court referred to as the “fair market value.” Although the

bankruptcycourt determined that the foreclosure value should

apply, sitting en banc we disagreed. Id. at 1191–92.

The en banc court answered the same question we

confront here: “what is the appropriate method of valuation

prescribed in a reorganization under Chapter 11 where

collateral is retained by the debtors for the debtors’ use?” Id.

at 1192. The court answered the question thus:

When a Chapter 11 debtor or a Chapter 13

debtor intends to retain property subject to a

lien, the purpose of a valuation under section

506(a) is not to determine the amount the

creditor would receive if it hypothetically had
IN THE MATTER OF SUNNYSLOPE HOUSING 31

to foreclose and sell the collateral. Neither

the foreclosure value nor the costs of

repossession are to be considered because no

foreclosure is intended. Instead, when the

proposed use of the property is continued

retention by the debtor, the purpose of the

valuation is to determine how much the

creditor will receive for the debtor’s

continued possession. . . .

In this case, the key fact is that the debtors

are going to possess the House. This fact

determines the disposition and use of the

creditor’s interest. The foreclosure value is

not relevant because no foreclosure is

intended by the Plan. The Taffis are in, not

outside of, bankruptcy. The IRS is not

foreclosing. Valuation must be accomplished

within the actual situation presented. 

Consequently, the value has to be the fair

market value of what the debtors are using.

Id. In reversing the bankruptcy court and adopting a fair

market value approach—“the price which a willing seller . . .

and a willing buyer . . . would agree upon after the property

has been exposed to the market for a reasonable time,”

id.—the decision “put this circuit in harmony with all other

circuits, except the Fifth, that have considered the

question[.]” Id. at 1193.

The Fifth Circuit had reached the opposite conclusion in

a case decided the same year. In 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 lien in a
32 IN THE MATTER OF SUNNYSLOPE HOUSING

Chapter 13 cramdown. The creditor argued that the truck’s

value should be determined based on “what it would cost the

debtors to purchase an identical vehicle,” that is, its

replacement value. Id. at 1038. Both the bankruptcy court

and the Fifth Circuit, sitting en banc, disagreed. Id.

The Fifth Circuit interpreted the text and structure of

section 506(a) to militate against replacement value. The

court determined that the first sentence of the statutory text

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 argument that the bankruptcycourt contravened the

statute’s “proposed disposition or use” language in the second

sentence by ignoring the Rashes’ proposed use of the truck

and instead valuing it according to what the creditor would

realize in a hypothetical disposition. Id. at 1047. The court

disagreed that just “because the collateral is being retained

and used by the debtor, its value is necessarily measured by

its worth to the debtor.” Id. at 1047–48. The Fifth Circuit

embraced the foreclosure value over a vigorous dissent,

which argued that “Section 506(a) is not difficult to interpret. 

Read as a whole, it plainly means that when a reorganizing

debtor retains and uses collateral, we must value the property

according to its worth to the debtor (the actual user), not to

the creditor (a purely hypothetical seller).” Id. at 1061

(Smith, J., dissenting).

The Supreme Court reversed. Rash, 520 U.S. at 959.

Interpreting section 506(a), the Court held that the truck’s

value was “the price a willing buyer 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 explained that its use of that term
IN THE MATTER OF SUNNYSLOPE HOUSING 33

was consistent with the Ninth Circuit’s understanding of the

term “fair market value” in Taffi: “the price a willing buyer

in the debtor’s trade, business, or situation would pay a

willing seller to obtain property of like age and condition.” 

Id. at 959 n.2.

The Court began by expressly rejecting the Fifth Circuit’s

“starting point”—what the creditor could realize in a

foreclosure sale. Id. at 960–61. The first sentence of section

506(a) contains no such requirement, the Court concluded. 

It instructs only that the secured portion of a creditor’s claim

is limited to the value of the collateral; it says nothing of

“how that interest is to be valued.” Id. at 961 (emphasis in

original). Instead, the second sentence’s “proposed

disposition or use” language “is of paramount importance to

the valuation question.” Id. at 962. The Court concluded that

the “disposition or use” of the collateral turns on the debtor’s

alternative choice to surrender collateral or retain and use it

pursuant to the cramdown provision, see 11 U.S.C.

§ 1325(a)(5), and that “[a]pplying a foreclosure-value

standard when the cram down option is invoked attributes no

significance to the different consequences of the debtor’s

choice . . . .” Rash, 520 U.S. at 962. In contrast, using

replacement value distinguishes between retention and

surrender, “renders meaningful the key words ‘disposition or

use,’” id., and “accurately gauges the debtor’s ‘use’ of the

property . . . in light of the proposed repayment plan

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 obtain a like asset for the same

‘proposed . . . use.’” Id. at 965. On the facts presented in

Rash, the debtor “elected to use the collateral to generate an

income stream. That actual use, rather than a foreclosure sale
34 IN THE MATTER OF SUNNYSLOPE HOUSING

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

see also id. at 964 (“Section 506(a) calls for the value the

property possesses in light of the ‘disposition or use’ in fact

‘proposed,’ not the various disposition or uses that might

have been proposed.”).

The Supreme Court’s instruction in Rash is plain, and its

application straightforward. When a debtor retains collateral

in a cramdown as in this case, its value turns on the debtor’s

“actual use” of the collateral as proposed in the

reorganization plan, id. at 963–64—not on a hypothetical

foreclosure value. As a leading treatise explains,

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

context, the question of value under section

506(a) turns on the value of the debtor’s

proposed use of the relevant property under

the plan, not the value achievable in a

foreclosure scenario that is not proposed. 

This is the case even though the

reorganization may ultimately fail and the

creditor may foreclose on its collateral as a

result.

2 Alan N. Resnick & Henry J. Sommer, Collier Bankr.

Manual ¶ 506.02[6][a] (4th ed. 2015); see also id. ¶

506.02[7][d][I] (applying Rash to establish value in Chapter

11 cramdowns where the debtor retains the collateral). That

value is measured by what the debtor would pay for a “like

asset for the same ‘proposed . . . use,’” Rash, 520 U.S. at 965,

or put differently, by “what a willing buyer in the debtor’s
IN THE MATTER OF SUNNYSLOPE HOUSING 35

trade, business, or situation would pay to obtain like

property[,]” id. at 960.

Here, Sunnyslope proposed in the reorganization 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 restrictive covenants—unless and until postconfirmation default and foreclosure. “That actual use, rather

than a foreclosure sale that will not take place, is the proper

guide . . . .” Id. at 963. Because any willing buyer in

Sunnyslope’s trade or business would take “like” property for

the purpose of providing affordable housing and subject to

similar restrictive covenants, the collateral’s value must be

determined in light of the same purpose and burdens. See

Taffi, 96 F.3d at 1192 (“Valuation must be accomplished

within the actual situation presented. Consequently, the value

has to be the fair market value of what the debtors are

using.”). The bankruptcy court therefore did not err in

valuing the property as affordable housing.

II.

A.

The foregoing discussion illuminates the majority’s

errors. Critically, the majority begins from the same

erroneous “starting point” as did the Fifth Circuit in its Rash

en banc opinion, valuing the collateral from the creditor’s

perspective. Indeed, the majority even borrows the same

“starting point” language. Compare Maj. Op. 20 (“The

starting point is that First Southern as a secured creditor

stands in the first position. . . . First Southern’s secured claim

is superior to the rights of other secured creditors. . . . If there

were a foreclosure sale, there is no doubt that the restrictive
36 IN THE MATTER OF SUNNYSLOPE HOUSING

provision would be swept away.”), with Rash, 90 F.3d at

1044 (describing the “logical starting point for valuation” as

“what the creditor could realize if it sold the estate’s interest

in the property according to the security agreement, taking

into account the rights of other creditors with liens secured by

the estate’s interest”), and Rash, 90 F.3d at 1051 n.18

(reading section 506(a) to “suggest[] a valuation that starts

with what the creditor could realize by repossession and sale

of the collateral”).

But the Supreme Court expressly rejected starting the

valuation from the creditor’s perspective. See Rash, 520 U.S.

at 960–61. Instead, the Court directed valuation from the

debtor’s perspective. Id. at 963 (“Of prime significance, the

replacement-value standard accurately gauges the debtor’s

‘use’ of the property.”); see also Taffi, 96 F.3d at 1192. The

majority opinion ignores this directive, instead adopting the

approach utilized by the Fifth Circuit in its en banc opinion

and advocated by Justice Stevens’s dissent in Rash. See

520 U.S. at 966 (Stevens., J., dissenting) (“[T]he value should

be determined from the creditor’s perspective, i.e., what the

collateral is worth, on the open market, in the creditor’s

hands, rather than in the hands of another party.”).

B.

The majority’s erroneous focus on First Southern’s

perspective stems from a concern that the bank got a raw deal

in light of its senior position. At the outset of its analysis, the

majority recognizes that no foreclosure sale occurred, yet

nonetheless concludes, “But that does not mean that the

secured value of First Southern’s secured claim may be

suppressed by conditions subordinated to its position and

attached to loans made by junior creditors.” Maj. Op. 20. 
IN THE MATTER OF SUNNYSLOPE HOUSING 37

Rash instructs, however, that the priority of First Southern’s

secured claim with respect to other creditors simply has no

place in an analysis that “turns on the value of the debtor’s

proposed use of the relevant property under the plan.” 2

Resnick & Sommer, Collier Bankr. Manual ¶ 506.02[6][a].

In any event, the majority’s concern is misplaced. First

Southern purchased its interest knowing that covenants

restricted the property’s use. When the bank purchased the

rights of the senior lender from HUD, HUD expressly

warranted in the loan sale agreement that First Southern

would obtain “a valid and enforceable lien on the related

Mortgaged Property having the lien priority indicated on the

Mortgage Loan Schedule, except for . . . (5) covenants,

conditions and restrictions, rights of way, easements and

other matters of public record[.]” (emphasis added). 

Although HUD released First Southern from the Regulatory

Agreement, it did not purport to vitiate the other restrictive

covenants requiring the property to be used as affordable

housing. Those publiclyrecorded restrictions, which run with

the land, arose from agreements subordinate to the loan First

Southern purchased and to the HUD Regulatory Agreement,

but, in the absence of a foreclosure, still require Sunnyslope

and its successors to operate the property as an affordable

housing complex. Thus, when First Southern purchased the

loan, it did so with knowledge of the restrictions, which likely

had already “suppressed” the value of the security interest

First Southern purchased: it bought an $8.5 million note for

approximately $5 million.

C.

The majority’s two direct attempts to avoid the conclusion

required by Rash are also unpersuasive. First, the majority
38 IN THE MATTER OF SUNNYSLOPE HOUSING

concludes that the reference to “use” in Rash means simply

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 compel

looking to Sunnyslope’s particular use of the property as

affordable housing. Maj. Op. 22–24 & n.5. This is

unpersuasive given the Supreme Court’s direction that the

collateral must be valued from the debtor’s perspective and

in light of the “economic benefit for the debtor derived from

the collateral.” Rash, 520 U.S. at 963. Ascertaining an

“accurate[] gauge of the debtor’s ‘use’ of the property”

requires determining present value with regard to how the

debtor proposes to use the property—and any restrictions on

the debtor’s use of the property—rather than focusing simply

on the fact the debtor retains ownership. See id. (emphasis

added). Indeed, in Rash the Supreme Court referred to the

debtor’s use of the collateralized truck not generally but

specifically “to generate an income stream” “in the freighthauling business.” Id. at 957, 963.

Even if the majority were correct that a section 506(a)

valuation looks only to the fact of “use,” its methodology still

contravenes the Supreme Court’s direction that replacement

value should measure the cost to obtain similar property. 

Rash, 520 U.S. at 955 (describing replacement value as “what

the debtor would have to pay for comparable property”)

(emphasis added); id. at 957 (“the price the Rashes would

have to pay to purchase a like vehicle”) (emphasis added); id.

at 960 (“the price a willing buyer in the debtor’s trade,

business, or situation would pay to obtain like property from

a willing seller”) (emphasis added); id. at 965 (“the cost the

debtor would incur to obtain a like asset for the same

‘proposed . . . use’”) (emphasis added).
IN THE MATTER OF SUNNYSLOPE HOUSING 39

No willing buyer would purchase similar property for a

price that does not reflect the restrictive covenants because,

as discussed above, those covenants burden how future

buyers could use the property. The most obvious evidence of

this is that First Southern paid significantly less for the

complex than it would have if the propertywere not burdened

by restrictive covenants. The majority is correct that the

“cost to build or buy an apartment complex like Sunnyslope

would be much more than the valuation . . . allowed by the

district court,” Maj. Op. 23, only if such a complex were not,

in fact, like the Sunnyslope complex, i.e., a 150-unit complex

used to provide affordable housing and restricted to that use

by covenants that run with the land.2

Second, the majority believes Rash should not apply

because using the replacement-value standard provides First

Southern with only one-third the value it would obtain in a

foreclosure sale. Thus, the majority concludes, using the

replacement-value standard here would disserve the policies

motivating Rash—protecting the creditor from the “double

risks” of a cramdown. Maj. Op. 24. Although the Supreme

Court recognized that foreclosure value is “typically lower”

than replacement value, 520 U.S. at 960, it did not direct a

different section 506(a) valuation in an atypical situation. 

Rather, its methodology is derived directly from the text of

the statute: using foreclosure value (whether it be higher or

2 For this reason, the analogy the majority draws in footnote five is inapt. 

Even if a seller were not expected to sell property at a discount based on

the buyer’s intended use, the seller would be expected to accept a

discounted purchase price where, as here, the buyer’s use of the property

is limited by law. The correct valuation does not turn on any particular

projected income stream, but on the fact that the economic benefit from

the property is limited by Sunnyslope’s proposed use and the restrictive

covenants.
40 IN THE MATTER OF SUNNYSLOPE HOUSING

lower than replacement value) would render superfluous the

terms “disposition or use” and therefore is inappropriate. Id.

at 962.

Moreover, First Southern and the majority overstate the

bank’s equities and need for protection. As noted above, First

Southern purchased its loan from HUD at a discount price

that presumably accounted for the risk of bankruptcy and the

property’s limitations, both of which are expressly identified

in the loan sale agreement. This distinguishes the bank from

the “innocent” lender First Southern hypothesizes in its

opening brief, that extends a mortgage to a farmer who

subsequently grants a conservation easement over the land,

depressing its value. First Southern purchased a lien on

propertyworth 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 ignores Rash’s directive to value the

collateral from the debtor’s perspective rather than from the

creditor’s when the debtor elects to retain it. Unsurprisingly,

this erroneous “starting point” leads to an erroneous ending

point: although the majority purports to use a “replacement

cost,” Maj. Op. 24–25, in essence it uses a hypothetical

foreclosure method of valuation—assigning to the

Sunnyslope complex the same value that would obtain if First

Southern foreclosed on the property and swept away the

restrictive covenants. As a result, the majority contravenes

the Supreme Court, and in doing so all but assures a postconfirmation default that will “have the negative effect of
IN THE MATTER OF SUNNYSLOPE HOUSING 41

eliminating the use of the Sunnyslope project for affordable

housing,” Maj. Op. 26. I respectfully dissent.3

3 As a result of the majority’s ruling, Sunnyslope’s cross-appeal is moot

and the appeal and cross-appeal in No. 13-1614 are also moot. Under

these circumstances, there is no need to address the issues raised in those

separate appeals.