The case is In re Sunnyslope Housing Ltd. Partnership, 859 F.3d 637 (9th Cir. 2017). It’s before the U.S. Supreme Court on Petition for a Writ of Certiorari, which is set for conference on January 5, 2018.
In Sunnyslope, the Ninth Circuit’s ruling is based on a Chapter 13 valuation standard established by the U.S. Supreme Court. This is unfortunate for two reasons:
–The Ninth Circuit turned a fact-intensive analysis into a legal question; and
–The Ninth Circuit adopted a rigid legal standard where flexibility is needed.
Sunnyslope is a Chapter 11 case with an “atypical” valuation issue:
—The asset is an apartment complex subject to covenants and restrictions for use as affordable housing; and
—The value of the complex as affordable housing is less than could be achieved if the secured creditor were to foreclose and then sell it as unrestricted housing.
Debtor wants to value the complex as affordable housing, while the secured creditor wants it valued at the higher foreclosure amount—as unrestricted housing.
Sunnyslope Valuation Evidence and Law
The Ninth Circuit provides this discussion of valuation evidence:
–Experts valued the complex at $7.0 to $7.74 million as unrestricted housing and at $2.6 to $4.885 million as affordable housing.
–The secured creditor acquired its Sunnyslope loan “at a substantial discount, knowing of the risk that the property would remain subject to the low-income housing requirements.“
The Ninth Circuit provides this analysis of existing valuation law:
–The Ninth Circuit “established long ago” (in In re Taffi, 96 F.3d 1190 (9th Cir. 1996)) that an asset should NOT be valued at a foreclosure sale price when the asset is to be retained under a Chapter 11 or Chapter 13 plan.
—Taffi was consistent, at the time, “with the approach of all but one circuit—the Fifth”; and the Fifth’s approach was rejected, one year later, by the U.S. Supreme Court in Associates Commercial Corporation v. Rash, 520 U.S. 953 (1997).
Why, Oh Why, Did the Ninth Circuit Abandon Factual Flexibility for a Legal Standard
So . . . why, oh why, did the Ninth Circuit decide to use U.S. Supreme Court words to replace factual flexibility with a legal standard? Here’s what the Ninth Circuit said:
“we take the Supreme Court at its word and hold, as Rash teaches, that § 506(a)(1) requires the use of replacement value rather than a hypothetical value derived from the very foreclosure that the reorganization is designed to avoid”?
The Ninth Circuit could have kept to a more flexible, fact-intensive analysis by focusing on other parts of its analysis and saying something more like this:
–Valuation as unrestricted housing is based upon the “extraordinary assumption” that “a foreclosure would remove” the “low-income housing requirements”;
–Valuing the asset subject to affordable housing restrictions is precisely the risk the secured lender bargained for when it acquired this loan subject to those restrictions; and
–Our ruling is consistent with, (i) our long-standing rule that an asset is NOT to be valued at a foreclosure sale price when it is to be retained under a Chapter 11 plan, and (ii) the U.S. Supreme Court’s rationale in its Rash ruling.
A flexible approach, like the foregoing, is precisely what other Courts have used. Examples are two cases cited in briefs on the Sunnyslope certiorari question:
—In re Heritage Highgate, 679 F.3d 132 (3rd Cir. 2012), involves a residential development with competing valuations—one based on income capitalization after future development and the other on current value. The Third Circuit gives many reasons for accepting current value over a future development projection, including a reference to the Supreme Court’s Rash rationale.
—United Air Lines, Inc. v. Regional Airports Improvement Corp., 654 F.3d 873 (7th Cir. 2009), involves the valuation of market rents for improvements at airport terminals. The Seventh Circuit affirms a valuation based on “evidence of actual transaction prices” over arguments “based on beliefs about what prices could have been.” This ruling mentions the Rash opinion only in passing.
Moreover, a flexible approach would have avoided the Petition for a Writ of Certiorari now pending in Sunnyslope and any need for the U.S. Supreme Court to resolve a split of legal authority on whether the Chapter 13 valuation standard in Rash controls in Chapter 11 as well.
Amici Curiae Brief
In the Sunnyslope certiorari process, a group of eight law professors and retired judges file an Amici Curiae Brief in support of the Petition. The eight amici declare in their Brief that they:
–“fundamentally disagree about the merits of this case” and, therefore, “do not take a substantive position” on the question presented; but
–nevertheless “come together in support” of the Petition “because of the systemic importance of settling the split in authorities created” by the Ninth Circuit’s Sunnyslope ruling.
It’s unfortunate this had to happen. Here are some reasons why:
–It’s impossible to predict what the Supreme Court will do on this. The Supreme Court has a long history of screwing up our bankruptcy world with rulings that seem inexplicable and counterproductive [e.g., Northern Pipeline, Granfinanciera and Stern v. Marshall].
–One way the Supreme Court screws up our bankruptcy world is by providing simple answers to complex questions that create uncertainty and unintended consequences (see, e.g., this article); and the Sunnyslope case appears to be a likely candidate for another simple answer to a complex question.
–The “we take the Supreme Court at its word” comment implies a hard-and-fast valuation ruling from the Supreme Court in Rash. Such an implication is false, as demonstrated by footnote 6 in the Rash opinion, which leaves a wide range of discretion to the bankruptcy courts:
“Our [decision] . . . leaves to bankruptcy courts, as triers of fact, identification of the best way of ascertaining replacement value on the basis of the evidence presented.”
“Whether replacement value is the equivalent of retail value, wholesale value, or some other value will depend on the type of debtor and the nature of the property.”
It’s unfortunate the Ninth Circuit had to create a legal dispute over valuation standards when it didn’t need to do so.
Now that the case is before the U.S. Supreme Court, and if they decide to grant a writ of certiorari, here’s hoping they don’t screw up our bankruptcy world, again, by providing another simple answer to a complex question.
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