First Southern Nat'l Bank v. Sunnyslope Housing, No. 12-17241 (9th Cir. 2016)
Annotate this CaseSunnyslope, as the debtor of a chapter 11 bankruptcy plan, exercised the cram down option pursuant to section 506(a) of the Bankruptcy Code and elected to retain the property at issue. Sunnyslope argued that the value of First Southern’s secured interest should be calculated with the affordable housing restrictions remaining in place. The bankruptcy court and the district court both agreed. First Southern appeals. The court denied Sunnyslope’s motion to dismiss the appeals as equitably moot. The court concluded that 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). 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 First Southern's interest. As a result, the plan of reorganization confirmed by the bankruptcy court and affirmed by the district court must be set aside, because it was based on an improper valuation of First Southern's interest. Accordingly, the court reversed and remanded for further proceedings.
Court Description: 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 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).
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