Source: http://ak.findacase.com/research/wfrmDocViewer.aspx/xq/fac.20170526_0001689.C09.htm/qx
Timestamp: 2019-04-19 23:23:49+00:00

Document:
In re Sunnyslope Housing Limited Partnership, Debtor.
First Southern National Bank, Defendant-Appellee.
Edward K. Poor (argued), Quarles & Brady LLP, Chicago, Illinois; Brian Sirower and Walter J. Ashbrook, Quarles & Brady LLP, Phoenix, Arizona; for Plaintiff-Appellant Plaintiff-Appellant.
Susan M. Freeman (argued), Henk Taylor, and Justin Henderson, Lewis and Roca LLP, Phoenix, Arizona; Bradley D. Pack, Scott B. Cohen, and David Wm. Engelman, Engelman Berger P.C., Phoenix, Arizona; for Defendant-Appellee Defendant-Appellee.
Donald L. Gaffney and Jasmin Yang, Snell & Wilmer LLP, Phoenix, Arizona, for Amici Curiae Arizona Bankers Association, California Bankers Association, Hawaii Bankers Association, Idaho Banks Association, Montana Bankers Association, and Washington Bankers Association.
Before: Sidney R. Thomas, Chief Judge, and Alex Kozinski, Diarmuid F. O'Scannlain, Susan P. Graber, Ronald M. Gould, Richard C. Tallman, Carlos T. Bea, Jacqueline H. Nguyen, Andrew D. Hurwitz, John B. Owens, and Michelle T. Friedland, Circuit Judges.
The en banc court affirmed the district court's judgment, which affirmed the bankruptcy court's affirmance of a Chapter 11 plan of reorganization, as modified on remand from the district court.
The debtor sought, over a secured creditor's objection, to retain and use the creditor's collateral in the Chapter 11 plan through a "cram down." Pursuant to 11 U.S.C. § 506(a)(1), the creditor's claim was treated as secured "to the extent of the value of such creditor's interest." That value was "determined in light of the purpose of the valuation and of the proposed disposition or use of such property." Under Associates Commercial Corp. v. Rash, 520 U.S. 953 (1997), a "replacement-value standard, " rather than a "foreclosure-value standard, " applies to cram-down valuations.
Here, unlike in a typical case, foreclosure value exceeded replacement value because foreclosure would vitiate covenants requiring that the secured property, an apartment complex, be used for low-income housing. The en banc court nonetheless held that, under Rash, § 506(a)(1) required the use of replacement value rather than a hypothetical value derived from the very foreclosure that the reorganization was designed to avoid. Thus, the bankruptcy court did not err in approving the debtor's plan of reorganization and valuing the collateral assuming its continued use after reorganization as low-income housing.
The en banc court held that the plan of reorganization was fair and equitable, as required by 11 U.S.C. § 1129(b), because the creditor retained its lien and received the present value of its allowed claim over the term of the plan. The secured claim was not undervalued, and the plan provided for payments equal to the present value of the secured claim.
The en banc court held that the bankruptcy court did not abuse its discretion in finding the plan of reorganization feasible.
Finally, the en banc court held that the bankruptcy court did not err in failing to allow the creditor, on remand, to make a second election to have its claim treated as either fully or partially secured under 11 U.S.C. § 1111(b).
Dissenting, Judge Kozinski, joined by Judges O'Scannlain and Friedland, wrote that the majority misinterpreted Rash, and the appropriate value of the secured property was the market price of the building without restrictive covenants.
When a debtor, over a secured creditor's objection, seeks to retain and use the creditor's collateral in a Chapter 11 plan of reorganization through a "cram down, " the Bankruptcy Code treats the creditor's claim as secured "to the extent of the value of such creditor's interest." 11 U.S.C § 506(a)(1). That value is to "be determined in light of the purpose of the valuation and of the proposed disposition or use of such property." Id.
In Associates Commercial Corp. v. Rash, the Supreme Court adopted a "replacement-value standard" for § 506(a)(1) cram-down valuations. 520 U.S. 953, 956 (1997). The Court held that replacement value, "rather than a foreclosure sale that will not take place, is the proper guide under a prescription hinged to the property's 'disposition or use.'" Id. at 963 (quoting In re Winthrop Old Farm Nurseries, Inc., 50 F.3d 72, 75 (1st Cir. 1995)).
In rejecting a "foreclosure-value standard, " the Court also noted that foreclosure value was "typically lower" than replacement value. Id. at 960. Today, however, we confront the atypical case. Because foreclosure would vitiate covenants requiring that the secured property-an apartment complex-be used for low-income housing, foreclosure value in this case exceeds replacement value, which is tied to the debtor's "actual use" of the property in the proposed reorganization. Id. at 963. But we take the Supreme Court at its word and hold, as Rash teaches, that § 506(a)(1) requires the use of replacement value rather than a hypothetical value derived from the very foreclosure that the reorganization is designed to avoid. Thus, the bankruptcy court did not err in this case in approving Sunnyslope's plan of reorganization and valuing the collateral assuming its continued use after reorganization as low-income housing.
Sunnyslope Housing Limited Partnership ("Sunnyslope") owns an apartment complex in Phoenix, Arizona. Construction funding came from three loans. Capstone Realty Advisors, LLC, provided the bulk of the funding through an $8.5 million loan with an interest rate of 5.35%, secured by a first-priority deed of trust. The Capstone loan was guaranteed by the United States Department of Housing and Urban Development ("HUD"), and funded through bonds issued by the Phoenix Industrial Development Authority. The City of Phoenix and the State of Arizona provided the balance of the funding. The City loan was secured by a second-position deed of trust, and the State loan by a third-position deed of trust.
1. To obtain the HUD guarantee, Sunnyslope signed a Regulatory Agreement requiring that the apartment complex be used for affordable housing.
2. Sunnyslope also entered into a Regulatory Agreement with the Phoenix Industrial Development Authority, requiring Sunnyslope to "preserve the tax-exempt status" of the project, and use 40% of the units for low-income housing. The agreement provided that its covenants "shall run with the land and shall bind the Owner, and its successors and assigns and all subsequent owners or operators of the Project or any interest therein." The restrictions, however, terminated on "foreclosure of the lien of the Mortgage or delivery of a deed in lieu of foreclosure."
3. The City of Phoenix required Sunnyslope to sign a Declaration of Affirmative Land Use Restrictive Covenants, mandating that 23 units be set aside for low-income families. The restriction ran with the land and bound "all future owners and operators" but, similarly, would be vitiated by foreclosure.

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