Property Value Hinged on Intended Use for Ch. 11 Plan

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By Daniel Gill

The value of real estate for the purposes of a Chapter 11 “cram down” plan must be based on the property’s replacement value, not the higher foreclosure value, the en banc Ninth Circuit determined May 26 ( First S. Nat’l Bank v. Sunnyslope Hous. Ltd. (In re Sunnyslope Housing Ltd.) , 2017 BL 177512, 9th Cir., No. 13-16180, 5/26/17 ).

Valuations of real property are often at the center of bankruptcy disputes. When it comes to valuing property for the purpose of confirming a Chapter 11 plan over the objection of a secured creditor—known as cram down—the value must be “determined in the light of the purpose of the valuation and of the proposed disposition or use of such property,” the court said, quoting 11 U.S.C. §506(a)(1).

Here, the foreclosure value of the property—which is usually considerably less than replacement or market value—was actually greater than the replacement value, because a foreclosure would wipe out property use restrictions for low income housing.

The property would be worth more than twice as much after a foreclosure.

“This was a perfect storm of bad facts for the secured lender,” due in no small part to the depressed real estate market in Arizona in 2009-2010, Howard Weg, a partner with Robins Kaplan LLP in Los Angeles, told Bloomberg BNA May 30.

But it was a close call, Weg thought, even though fairness might have militated better in favor of the secured lender under the circumstances.

The court adhered to the Supreme Court’s ruling in Associates Commercial Corp. v. Rash, which “instructs that a §506(a)(1) valuation cannot consider what would happen after a hypothetical foreclosure—the valuation must instead reflect the property’s ‘actual use.’” Here that actual use, under the plan, was for low income housing.

The majority opinion by Judge Andrew D. Hurwitz reversed an earlier split three-judge panel decision. Seven judges out of the eleven judge panel joined in the decision.

Judge Alex Kozinski dissented, joined by judges Diarmuid F. O’Scannlain and Michelle T. Friedland. Kozinski accused the majority of an over-literal reading of Rash, saying the court “fetishizes” the Supreme Court’s “words at the expense of its logic.”

The dissent read Rash to protect higher property values for the benefit of secured creditors. It “was unambiguously motivated by a desire to reduce what it saw as the ‘double risks’ that cramdowns pose for creditors: ‘The debtor may again default and the property may deteriorate from extended use,’” Kozinski said.

But because the secured creditor maintains its liens, it can still benefit from the higher value if it forecloses in the future, the majority responded.

Debtor Sunnyslope Housing L.P. was represented by Susan M. Freeman, Phoenix. Edward K. Poor, Phoenix, represented lender First Southern National Bank.

To contact the reporter on this story: Daniel Gill in Washington at

To contact the editor responsible for this story: Jay Horowitz at

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