To cram down a secured creditor, the debtor must pay the “allowed secured claim” in full. Section 506(a) tells us that the allowed secured claim is the value of the property. It clarifies that by saying, “Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property.” That means that if the debtor intends to keep the property, it must be valued as a going concern, i.e., the value for the use that the debtor proposes.
In In re Sunnyslope Housing Limited Partnership — F. 3d, —- (9th Cir. April, 2016), we have some weird facts that have resulted in a totally wrong ruling.
The real property in Sunnyslope was subject to restrictions that required that it be used only for affordable housing. That means low rent, and that factors into the value. The problem? The restrictions go away upon foreclosure (or repayment of the loans I believe). The values are not contested. $2.9 million as affordable housing; $7 million as is without the restrictions. The bank was owed about $8 million.
The debtor’s plan proposed that it keep the property and pay $2.9 million over time. The bank objected saying the value should be $7 million, i.e., without the restrictions, since if it were to foreclose, it would get $7 million or a building worth $7 million.
The 9th Circuit ruled, 2-1, that “value” means “replacement value.” The 9th Circuit commented that “[t]he cost to build or buy an apartment complex like Sunnyslope would be much more” than $2.9 million. It does not say where that evidence came from or how much that might be. To “buy” an affordable housing building presumably would cost $2.9 million. To build that particular building might very well cost more but the government loans might reduce the cost in terms of interest rates. There is no discussion of that. But the 9th Circuit has ruled that value means the cost to build a building in the condition and location of this building. How does it get to that? The Supreme Court in Rash. Rash does not say that. Rash says if the debtor is going to keep the truck, he has to pay retail basically, not the first sale value that the creditor would get by repossessing and reselling.
The debtor has filed a Motion for Rehearing or Rehearing en banc. The 9th Circuit ordered the bank to file a response so maybe they will consider the request.
Couple other thoughts:
1. The bank made the 1111(b) election. That means it will eventually receive $8 million. The effect of this ruling then is that it wants interest on $7 million instead of $2.9 million which almost surely makes the plan infeasible.
2. Why isn’t this case moot? The Motion for Rehearing says, “Holding that a consummated plan with multiple implemented transactions and payments can be axed, instead of applying a scalpel to specific provisions, conflicts with decisions across the circuits, including this one.” This is especially unfortunate for the new investor since the matter was appealed to the 9th Cir in October, 2012 and not resolved until March 2016. And the resolution is to send it back to the bankruptcy court. Further note: briefing at the 9th Circuit was completed in October 2014.
Besides being incorrect, the majority opinion is an obfuscated mess. This case did not set forth a clear rule which can be applied by lower courts.
Suppose the value of this property was $12 million after foreclosure. Now you have a situation where, for the first lienholder, the value is $12 million and the creditor is oversecured and adequately protected with all of its lien in the best tranche.
Now, the second lienholder is still subject to the affordable housing restrictions. For the second lienholder, the Court has to value the property at $3.9 million. The second lienholder is wholly unsecured and subject to a lien strip! It would have been wiped out by the foreclosure anyway!
Then we move on to the liquidation analysis.
With respect to the first lienholder, there is about $4 million in equity.
With respect to the second lienholder, there is no equity in the Estate.
With respect to general unsecured creditors, is there $4 million in equity or $0 in equity?
I can add more layers of complexity. Suppose there is a third judgment lienholder who is not subject to any of those restrictions. The value of the property is $12 million for the third lienholder.
So now I can strip the second lien but not the third!
The 9th Circuit ruling is that the property must be valued at “replacement” value, I.e., the cost to build the same property. Why? Because that’s what Rash says. Wrong!