In Sunnyslope Housing Ltd. Partnership, the Ninth Circuit held that for chapter 11 cramdown purposes, the valuation of property need not account for the potential extinguishment of subordinated affordable housing covenants which, if extinguished through foreclosure, would significantly increase the value of the property. As such, the Ninth Circuit allowed the much lower valuation of the property which assumed the covenants were in place and allowed the debtor to value the senior lender’s secured claim at a very low number. This allowed the debtor to value the lender’s secured claim at a low amount and treat the rest of its claim as unsecured under Bankruptcy Code section 506(a).
The Ninth Circuit found that the proper valuation for cramdown was the “replacement-value,” which assumed the subordinated affordable housing covenants were in place, as opposed to the “foreclosure-value,” which would value the property as if the subordinated covenants had been foreclosed out. The Ninth Circuit seemed to gloss over the fact that the covenants were expressly subordinate to the senior lien. Instead, the Ninth Circuit relied on Associates Commercial Corp. v. Rash, 520 U.S. 952 (1997), in finding that “replacement-value” was the proper valuation method, which did not require consideration of the value if the junior affordable housing covenants were foreclosed out. This is a very important case for Chapter 11 debtors and lenders, although obviously not favorable for lenders.
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