First Southern National Bank v. Sunnyslope Housing Ltd. Partnership, No. 12-17241 (9th Cir. 2017)
Annotate this CaseIn Associates Commercial Corp. v. Rash, 520 U.S. 953, 956 (1997), the Supreme Court adopted a replacement-value standard for 11 U.S.C. 506(a)(1) cram-down valuations, holding 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. In this case, the en banc court held that, 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 debtor’s actual use of the property in the proposed reorganization. The en banc court held, as Rash teaches, that section 506(a)(1) requires the use of replacement value rather than a hypothetical value derived from the very foreclosure that the reorganization was designed to avoid. The bankruptcy court did not err here by approving debtor's plan of reorganization and valuing the collateral assuming its continued use after reorganization as low-income housing. Accordingly, the en banc court affirmed the district court's judgment affirming the bankruptcy court's affirmance of debtor's Chapter 11 plan of reorganization.
Court Description: Bankruptcy. 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
This opinion or order relates to an opinion or order originally issued on April 8, 2016.
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