9th Circuit Doubles Down on Rash on 506(a) Valuation and Rejects Second Chance 1111(b) Election
In Sunnyslope Housing LTD. Partnership, an en banc court was presented with an unusual fact pattern when a creditor objected to the valuation method used to value real property for purposes of cramming down the loan pursuant to 11 U.S.C. 506(a). The creditor argued for a "highest and best use valuation" because foreclosure of the property eliminated covenants and restrictions that required the property to be devoted to low income housing. The foreclosure value was argued to be 7.74 million while the value was 4,86 million if the restrictions remained.
The court disagreed and applied Rash's replacement value standard, stating that while protection of creditors' interest is important under Chapter 11, successful debtor reorganization and maximization of the value of the estate are the primary proposes. Unlike in Rash, in this case, the property's foreclosure value was higher than the replacement value. 506(a)(1) requires determining the value "in light of the purpose of the valuation and of the proposed disposition or use of such property". The Supreme Court's Rash opinion held that in a plan of reorganization involving cram down, the debtor will continue to use the collateral and "actual use" is "the proper guide", thus replacement value is "the price a willing buyer in the debtor's trade, business or situation would pay to obtain like property."
Also on appeal was the bankruptcy court’s denial of creditor’s request to change its 1111(b) election. After unsuccessful appeal to the District Court, who affirmed the bankruptcy court's use of “replacement value”, but who remanded for the bankruptcy court to add in tax credits to the valuation. The Creditor had been ordered by the bankruptcy court to make its 1111(b) election within 7 days after the court issued its ruling on valuation. The creditor elected to be treated as fully secured, despite having received unfavorable valuation ruling, and thereby betting on its chances of winning its appeal. On remand by the District Court, the bankruptcy court denied the creditor's request to change its election. There having been no material change to the Chapter 11 plan, the court denied the request, which would have given the creditor the ability, as a significant unsecured claim, to prevent approval of the plan. Opinion.